Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q 
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission file number: 001-35355
 _____________________________________________________________
MANNING & NAPIER, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
45-2609100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
290 Woodcliff Drive
Fairport, New York
 
14450
(Address of principal executive offices)
 
(Zip Code)

(585) 325-6880
Registrant’s telephone number, including area code
_____________________________________________________________ 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common stock, $0.01 par value per share
MN
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  x    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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions 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
 
x
  
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
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 financial 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  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding at November 8, 2019
Class A common stock, $0.01 par value per share
  
15,594,407
 




TABLE OF CONTENTS
 
 
 
Page
Part I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
Item 1A.
Item 6.
 
 
 
 
In this Quarterly Report on Form 10-Q, “we”, “our”, “us”, the “Company”, “Manning & Napier” and the “Registrant” refers to Manning & Napier, Inc. and, unless the context otherwise requires, its consolidated direct and indirect subsidiaries and predecessors.
 
 


i

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Manning & Napier, Inc.
Consolidated Statements of Financial Condition
(U.S. dollars in thousands, except share data)
 
 
 
September 30, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
88,383

 
$
59,586

Accounts receivable
 
10,767

 
11,447

Investment securities
 
64,658

 
91,190

Prepaid expenses and other assets
 
4,918

 
5,221

Total current assets
 
168,726

 
167,444

Property and equipment, net
 
6,206

 
5,649

Operating lease right-of-use assets
 
19,325

 

Net deferred tax assets, non-current
 
20,367

 
20,795

Goodwill
 
4,829

 
4,829

Other long-term assets
 
4,046

 
3,842

Total assets
 
$
223,499

 
$
202,559

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
1,612

 
$
1,845

Accrued expenses and other liabilities
 
20,242

 
25,126

Deferred revenue
 
11,175

 
9,305

Total current liabilities
 
33,029

 
36,276

Operating lease liabilities, non-current
 
19,321

 

Amounts payable under tax receivable agreement, non-current
 
17,521

 
17,349

Other long-term liabilities
 
592

 
2,691

Total liabilities
 
70,463

 
56,316

Commitments and contingencies (Note 9)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized; and 15,610,595 and 15,310,958 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
 
156

 
153

Additional paid-in capital
 
198,429

 
198,604

Retained deficit
 
(37,842
)
 
(38,865
)
Accumulated other comprehensive loss
 
(35
)
 
(77
)
Total shareholders’ equity
 
160,708

 
159,815

Noncontrolling interests
 
(7,672
)
 
(13,572
)
Total shareholders’ equity and noncontrolling interests
 
153,036

 
146,243

Total liabilities, shareholders’ equity and noncontrolling interests
 
$
223,499

 
$
202,559

The accompanying notes are an integral part of these consolidated financial statements.


1

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Operations
(U.S. dollars in thousands, except share data)
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
 
Management Fees
 
 
 
 
 
 
 
 
Separately managed accounts
 
$
21,981

 
$
24,228

 
$
65,194

 
$
74,066

Mutual funds and collective investment trusts
 
7,015

 
10,596

 
22,646

 
32,606

Distribution and shareholder servicing
 
2,570

 
2,974

 
7,760

 
9,185

Custodial services
 
1,763

 
2,021

 
5,258

 
5,838

Other revenue
 
849

 
729

 
2,411

 
2,197

Total revenue
 
34,178

 
40,548

 
103,269

 
123,892

Expenses
 
 
 
 
 
 
 
 
Compensation and related costs
 
19,504

 
23,105

 
61,113

 
68,567

Distribution, servicing and custody expenses
 
2,959

 
4,518

 
9,736

 
13,801

Other operating costs
 
8,286

 
8,392

 
25,232

 
23,425

Total operating expenses
 
30,749

 
36,015

 
96,081

 
105,793

Operating income
 
3,429

 
4,533

 
7,188

 
18,099

Non-operating income (loss)
 
 
 
 
 
 
 
 
Interest expense
 
(13
)
 
(18
)
 
(26
)
 
(48
)
Interest and dividend income
 
782

 
519

 
2,428

 
1,395

Change in liability under tax receivable agreement
 
(394
)
 
113

 
(199
)
 
404

Net gains (losses) on investments
 
40

 
105

 
1,162

 
(165
)
Gain on sale of business
 
2,883

 

 
2,883

 

Total non-operating income
 
3,298

 
719

 
6,248

 
1,586

Income before provision for income taxes
 
6,727

 
5,252

 
13,436

 
19,685

Provision for income taxes
 
150

 
274

 
723

 
1,244

Net income attributable to controlling and noncontrolling interests
 
6,577

 
4,978

 
12,713

 
18,441

Less: net income attributable to noncontrolling interests
 
5,753

 
4,198

 
10,914

 
15,681

Net income attributable to Manning & Napier, Inc.
 
$
824

 
$
780

 
$
1,799

 
$
2,760

 
 
 
 
 
 
 
 
 
Net income per share available to Class A common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.05

 
$
0.05

 
$
0.12

 
$
0.18

Diluted
 
$
0.05

 
$
0.05

 
$
0.12

 
$
0.18

Weighted average shares of Class A common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
15,290,595

 
14,740,541

 
15,163,205

 
14,583,570

Diluted
 
15,600,686

 
78,096,830

 
15,466,339

 
78,134,657

The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income attributable to controlling and noncontrolling interests
 
$
6,577

 
$
4,978

 
$
12,713

 
$
18,441

Net unrealized holding gains (losses) on investment securities, net of tax
 
(9
)
 
55

 
223

 
(92
)
Reclassification adjustment for net realized gains on investment securities included in net income
 
(15
)
 

 
(21
)
 

Comprehensive income
 
$
6,553

 
$
5,033

 
$
12,915

 
$
18,349

Less: Comprehensive income attributable to noncontrolling interests
 
5,730

 
4,243

 
11,074

 
15,606

Comprehensive income attributable to Manning & Napier, Inc.
 
$
823

 
$
790

 
$
1,841

 
$
2,743


The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Shareholders’ Equity
(U.S. dollars in thousands, except share data)
(Unaudited) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock –  Class A
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interests
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
Three months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—June 30, 2019
15,620,595

 
$
156

 
$
198,304

 
$
(38,372
)
 
$
(34
)
 
$
(11,324
)
 
$
148,730

Net income

 

 

 
824

 

 
5,753

 
6,577

Distributions to noncontrolling interests

 

 

 

 

 
(2,624
)
 
(2,624
)
Net changes in unrealized investment securities gains or losses

 

 

 

 
(1
)
 
(8
)
 
(9
)
Common stock issued under equity compensation plan, net of forfeitures
(10,000
)
 

 

 

 

 

 

Equity-based compensation

 

 
125

 

 

 
531

 
656

Dividends declared on Class A common stock - $0.02 per share

 

 

 
(294
)
 

 

 
(294
)
Balance—September 30, 2019
15,610,595

 
$
156

 
$
198,429

 
$
(37,842
)
 
$
(35
)
 
$
(7,672
)
 
$
153,036

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—December 31, 2018
15,310,958

 
$
153

 
$
198,604

 
$
(38,865
)
 
$
(77
)
 
$
(13,572
)
 
$
146,243

Net income

 

 

 
1,799

 

 
10,914

 
12,713

Distributions to noncontrolling interests

 

 

 

 

 
(5,043
)
 
(5,043
)
Net changes in unrealized investment securities gains or losses

 

 

 

 
42

 
181

 
223

Common stock issued under equity compensation plan, net of forfeitures
299,637

 
3

 
(3
)
 

 

 

 

Shares withheld to satisfy tax withholding requirements related to equity awards vested

 

 
(15
)
 

 

 
(63
)
 
(78
)
Equity-based compensation

 

 
527

 

 

 
2,279

 
2,806

Dividends declared on Class A common stock - $0.06 per share

 

 

 
(852
)
 

 

 
(852
)
Cumulative effect of change in accounting principle, net of taxes (Note 8)

 

 

 
76

 

 

 
76

Impact of changes in ownership of Manning & Napier Group, LLC (Note 4)

 

 
(684
)
 

 

 
(2,368
)
 
(3,052
)
Balance—September 30, 2019
15,610,595

 
$
156

 
$
198,429

 
$
(37,842
)
 
$
(35
)
 
$
(7,672
)
 
$
153,036






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Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock –  Class A
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interests
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—June 30, 2018
15,333,041

 
$
153

 
$
198,488

 
$
(38,626
)
 
$
(113
)
 
$
(17,644
)
 
$
142,258

Net income

 

 

 
780

 

 
4,198

 
4,978

Distributions to noncontrolling interests

 

 

 

 

 
(2,045
)
 
(2,045
)
Net changes in unrealized investment securities gains or losses

 

 

 

 
10

 
45

 
55

Equity-based compensation

 

 
85

 

 

 
378

 
463

Dividends declared on Class A common stock - $0.08 per share

 

 

 
(1,226
)
 

 

 
(1,226
)
Balance—September 30, 2018
15,333,041

 
$
153

 
$
198,573

 
$
(39,072
)
 
$
(103
)
 
$
(15,068
)
 
$
144,483

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—December 31, 2017
15,039,347

 
$
150

 
$
198,641

 
$
(38,424
)
 
$
(86
)
 
$
(21,921
)
 
$
138,360

Net income

 

 

 
2,760

 

 
15,681

 
18,441

Distributions to noncontrolling interests

 

 

 

 

 
(10,226
)
 
(10,226
)
Net changes in unrealized investment securities gains or losses

 

 

 

 
(17
)
 
(75
)
 
(92
)
Common stock issued under equity compensation plan, net of forfeitures
293,694

 
3

 
(3
)
 

 

 

 

Equity-based compensation

 

 
382

 

 

 
1,720

 
2,102

Dividends declared on Class A common stock - $0.24 per share

 

 

 
(3,674
)
 

 

 
(3,674
)
Cumulative effect of change in accounting principle, net of taxes

 

 

 
266

 

 
1,224

 
1,490

Impact of changes in ownership of Manning & Napier Group, LLC

 

 
(447
)
 

 

 
(1,471
)
 
(1,918
)
Balance—September 30, 2018
15,333,041

 
$
153

 
$
198,573

 
$
(39,072
)
 
$
(103
)
 
$
(15,068
)
 
$
144,483

The accompanying notes are an integral part of these consolidated financial statements.


5

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
 
 
 
Nine months ended September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income attributable to controlling and noncontrolling interests
 
$
12,713

 
$
18,441

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
2,806

 
2,102

Depreciation and amortization
 
1,202

 
1,333

Change in amounts payable under tax receivable agreement
 
199

 
(404
)
Gain on sale of intangible assets
 
(160
)

(2,575
)
Gain on sale of business
 
(2,883
)
 

Net (gains) losses on investment securities
 
(1,162
)
 
165

Deferred income taxes
 
504

 
954

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
668

 
2,061

Prepaid expenses and other assets
 
282

 
1,203

Long-term assets
 
1,898


(124
)
Accounts payable
 
(232
)
 
216

Accrued expenses and other liabilities
 
(6,826
)
 
(9,400
)
Deferred revenue
 
1,870

 
(308
)
Long-term liabilities
 
(2,162
)
 
(687
)
Net cash provided by operating activities
 
8,717

 
12,977

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(1,689
)
 
(1,369
)
Sale of investments
 
9,937

 
2,533

Purchase of investments
 
(84,544
)
 
(46,677
)
Sale of intangible assets
 
160


2,575

Proceeds from sale of business, net
 
2,902

 

Proceeds from maturity of investments
 
102,523

 
44,297

Net cash provided by investing activities
 
29,289

 
1,359

Cash flows from financing activities:
 
 
 
 
Distributions to noncontrolling interests
 
(5,043
)
 
(10,226
)
Dividends paid on Class A common stock
 
(932
)
 
(3,650
)
Payment of shares withheld to satisfy withholding requirements
 
(78
)
 

Payment of capital lease obligations
 
(104
)
 
(98
)
Purchase of Class A units of Manning & Napier Group, LLC
 
(3,052
)
 
(1,918
)
Net cash used in financing activities
 
(9,209
)
 
(15,892
)
Net increase (decrease) in cash and cash equivalents
 
28,797

 
(1,556
)
Cash and cash equivalents:
 
 
 
 
Beginning of period
 
59,586

 
78,262

End of period
 
$
88,383

 
$
76,706

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

Manning & Napier, Inc.
Notes to Consolidated Financial Statements

Note 1—Organization and Nature of the Business
Manning & Napier, Inc. ("Manning & Napier" or the "Company") provides a broad range of investment solutions through separately managed accounts, mutual funds, and collective investment trust funds, as well as a variety of consultative services that complement its investment process. Founded in 1970, the Company offers equity, fixed income and alternative strategies, as well as a range of blended asset portfolios, including life cycle funds. Headquartered in Fairport, New York, the Company serves a diversified client base of high-net-worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations.
The Company was incorporated in 2011 as a Delaware corporation, and is the sole managing member of Manning & Napier Group, LLC and its subsidiaries (“Manning & Napier Group”), a holding company for the investment management businesses conducted by its operating subsidiaries. The diagram below depicts the Company's organizational structure as of September 30, 2019.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13203263&doc=12  
(1)
The consolidated operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC ("MNA"), Manning & Napier Information Services, LLC, Manning & Napier Investor Services, Inc., Exeter Trust Company and Rainier Investment Management, LLC ("Rainier").
Note 2—Summary of Significant Accounting Policies
Critical Accounting Policies
The Company's critical accounting policies and estimates are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018. The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, these financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The financial data for the interim periods may not necessarily be indicative of results for future interim periods or for the full year.
Changes to the Company's accounting policies as a result of adoption ASU 2016-02, Leases (Topic 842) are discussed under "Leases" below and in Note 8.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from these estimates or assumptions.


7

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Gain on Sale of Business
On June 28, 2019, the Company, through Manning & Napier Group, entered into an agreement (the "Agreement") to sell all of the equity interests in its wholly-owned subsidiary, Perspective Partners, LLC ("PPI") to Manning Partners, LLC, which is wholly-owned by the Chairman of the Company's Board of Directors (Note 13). The purchase price is based on historical expenses of PPI from September 1, 2018 until the date of closing, and future revenue payments, as applicable.
The sale was completed on August 30, 2019. The Company received cash proceeds of $3.1 million, transferred net assets of $0.2 million and recorded a $2.9 million gain on the sale, which is included as "Gain on sale of business" on its consolidated statements of operations. The Company did not recognize an asset for the contingent consideration as of the closing date. Other than the cash proceeds received, the transaction did not have a material impact to its consolidated statements of financial condition. The sale did not represent a major strategic shift in the Company's business and did not qualify for discontinued operations reporting.
Principles of Consolidation
The Company consolidates all majority-owned subsidiaries. In addition, as of September 30, 2019, Manning & Napier holds an economic interest of approximately 18.9% in Manning & Napier Group but, as managing member, controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”) and Manning & Napier Capital Company, LLC (“MNCC”).
All material intercompany transactions have been eliminated in consolidation.
In accordance with Accounting Standards Update ("ASU") 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance, and whether a company is obligated to absorb losses or receive benefits that could potentially be significant to the entity. The standard also requires ongoing assessments of whether a company is the primary beneficiary of a variable interest entity (“VIE”). When utilizing the voting interest entity ("VOE") model, controlling financial interest is generally defined as majority ownership of voting interests.
The Company provides seed capital to its investment teams to develop new strategies and services for its clients. The original seed investment may be held in a separately managed account, comprised solely of the Company's investments or within a mutual fund, where the Company's investments may represent all or only a portion of the total equity investment in the mutual fund. Pursuant to U.S. GAAP, the Company evaluates its investments in mutual funds on a regular basis and consolidates such mutual funds for which it holds a controlling financial interest. When no longer deemed to hold a controlling financial interest, the Company would deconsolidate the fund and classify the remaining investment as either an equity method investment or as trading securities, as applicable. As of September 30, 2019 and December 31, 2018, the Company did not have investments classified as an equity method investment.
The Company serves as the investment adviser for Manning & Napier Fund, Inc. series of mutual funds (the “Fund”), Exeter Trust Company Collective Investment Trusts (“CIT”) and Rainier Multiple Investment Trust. The Fund, CIT and Rainier Multiple Investment Trust are legal entities, the business and affairs of which are managed by their respective boards of directors. As a result, each of these entities is a VOE. The Company holds, in limited cases, direct investments in a mutual fund (which are made on the same terms as are available to other investors) and consolidates each of these entities where it has a controlling financial interest or a majority voting interest. The Company's investments in the Fund amounted to approximately $4.0 million as of September 30, 2019 and $3.6 million as of December 31, 2018. As of September 30, 2019 and December 31, 2018, the Company did not have a controlling financial interest in any mutual fund.
Revenue
Investment Management: Investment management fees are computed as a percentage of assets under management ("AUM"). The Company's performance obligation is a series of services that form part of a single performance obligation satisfied over time.
Separately managed accounts are paid in advance, typically for a semi-annual or quarterly period, or in arrears, typically for a monthly or quarterly period. When investment management fees are paid in advance, the Company defers the revenue as a contract liability and recognizes it over the applicable period. When investment management fees are paid in arrears, the Company estimates revenue and records a contract asset (accrued accounts receivable) based on AUM as of the most recent month end date.
Mutual funds and collective investment trust investment management revenue is calculated and earned daily based on AUM. Revenue is presented net of cash rebates and fees waived pursuant to contractual expense limitations of the funds. The

8

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Company also has agreements with third parties who provide recordkeeping and administrative services for employee benefit plans participating in the collective investment trusts. The Company is acting as an agent on behalf of the employee benefit plan sponsors, therefore, investment management revenue is recorded net of fees paid to third party service providers.
Distribution and shareholder servicing: The Company receives distribution and servicing fees for providing services to its affiliated mutual funds. Revenue is computed and earned daily based on a percentage of AUM. The performance obligation is a series of services that form part of a single performance obligation satisfied over time. The Company has agreements with third parties who provide distribution and administrative services for its mutual funds. The agreements are evaluated to determine whether revenue should be reported gross or net of payments to third-party service providers. The Company controls the services provided and acts as a principal in the relationship. Therefore, distribution and shareholder servicing revenue is recorded gross of fees paid to third parties.
Custodial services: Custodial service fees are calculated as a percentage of the client’s market value with additional fees charged for certain transactions. For the safeguarding and administrative services that are subject to a percentage of market value fee, the Company's performance obligation is a series of services that form part of a single performance obligation satisfied over time. Revenue for transactions assigned a stand-alone selling price is recognized in the period in which the transaction is executed. Custodial service fees are billed monthly in arrears. The Company has agreements with third parties who provide safeguarding, recordkeeping and administrative services for their clients. The Company controls the services provided and acts as a principal in the relationship. Therefore, custodial service revenue is recorded gross of fees paid to third parties.
Costs to Obtain a Contract
Incremental first year commissions directly associated with new separate account and collective investment trust contracts are capitalized and amortized on a straight-line basis over the estimated customer contract period of 7 years for separate accounts and 3 years for collective investment trust contracts. Refer to Note 3 for further discussion.
Cash and Cash Equivalents
The Company generally considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are primarily held in operating accounts at major financial institutions and also in money market securities. Cash equivalents are stated at cost, which approximates market value due to the short-term maturity of these investments. The fair value of cash equivalents has been classified as Level 1 in accordance with the fair value hierarchy.
Investment Securities
Investment securities are classified as either trading, equity method investments or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities, and investments in mutual funds for which the Company provides advisory services. Realized and unrealized gains and losses on trading securities are recorded in net gains (losses) on investments in the consolidated statements of operations. At September 30, 2019, trading securities consist of investments held by the Company to provide initial cash seeding for product development purposes and investments to hedge economic exposure to market movements on its deferred compensation plan.
Investments classified as equity method investments represent seed investments in which the Company owns between 20-50% of the outstanding voting interests in the affiliated fund or when it is determined that the Company is able to exercise significant influence but not control over the investments. If the seed investment results in significant influence, but not control, the investment will be accounted for as an equity method investment. When using the equity method, the Company recognizes its share of the investee's net income or loss for the period which is recorded in net gains (losses) on investments in the consolidated statements of operations.
Investment securities classified as available-for-sale consist of U.S. Treasury notes, corporate bonds and other short-term investments. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported, net of deferred income tax, as a separate component of accumulated other comprehensive income in shareholders’ equity until realized. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. If impairment is determined to be other-than-temporary, the carrying value of the security will be written down to fair value and the loss will be recognized in earnings. Realized gains and losses on sales of available-for-sale securities are computed on a specific identification basis and are recorded in net gains (losses) on investments in the consolidated statements of operations.

9

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Property and Equipment
Property and equipment is presented net of accumulated depreciation of approximately $11.2 million and $11.3 million as of September 30, 2019 and December 31, 2018, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess cost over the fair value of the identifiable net assets of acquired companies. Identifiable intangible assets generally represent the cost of client relationships and investment management agreements acquired as well as trademarks. Goodwill and indefinite-lived assets are tested for impairment annually or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Intangible assets subject to amortization are tested for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Goodwill and intangible assets require significant management estimate and judgment, including the valuation and expected life determination in connection with the initial purchase price allocation and the ongoing evaluation for impairment.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, accrued expenses and other liabilities and operating lease liabilities, non-current on its consolidated statements of financial condition. Finance leases are included in other long-term assets, accrued expenses and other liabilities, and other long-term liabilities on its consolidated statements of financial condition.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate, for each identified lease, is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. The operating lease ROU asset is reduced for any lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, which are combined for all classes of underlying assets.
Operating Segments
The Company operates in one segment, the investment management industry.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which provides an optional transition method related to implementing the new lease standard. The Company adopted the new standard on its effective date of January 1, 2019. Refer to Note 8 for further discussion regarding the impact of adoption.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate as a result of the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate. The ASU will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company's adoption of ASU 2018-02 on January 1, 2019 did not have a material impact on its consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. The ASU requires goodwill impairments to be measured on the basis of the fair value of the reporting unit relative to the reporting unit's carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. The ASU is effective for annual and interim impairment tests for periods beginning after December 15, 2019. Early adoption is allowed for annual and interim impairment tests occurring after January 1, 2017. The Company is evaluating the effect of adopting this new accounting standard.

10

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 3—Revenue
Disaggregated Revenue
The following tables represent the Company’s separately managed account and mutual fund and collective investment trust investment management revenue by investment portfolio during the three and nine months ended September 30, 2019 and September 30, 2018:
 
 
Three months ended September 30, 2019
 
Three months ended September 30, 2018
 
 
Separately managed accounts
 
Mutual funds and collective investment trusts
 
Total
 
Separately managed accounts
 
Mutual funds and collective investment trusts
 
Total
 
 
(in thousands)
Blended Asset
 
$
16,663

 
$
4,200

 
$
20,863

 
$
17,864

 
$
6,485

 
$
24,349

Equity
 
4,742

 
2,805

 
7,547

 
5,736

 
3,988

 
9,724

Fixed Income
 
576

 
10

 
586

 
628

 
123

 
751

Total
 
$
21,981

 
$
7,015

 
$
28,996

 
$
24,228

 
$
10,596

 
$
34,824

 
 
Nine months ended September 30, 2019
 
Nine months ended September 30, 2018
 
 
Separately managed accounts
 
Mutual funds and collective investment trusts
 
Total
 
Separately managed accounts
 
Mutual funds and collective investment trusts
 
Total
 
 
(in thousands)
Blended Asset
 
$
49,304

 
$
13,678

 
$
62,982

 
$
54,183

 
$
19,635

 
$
73,818

Equity
 
14,121

 
8,857

 
22,978

 
17,923

 
12,699

 
30,622

Fixed Income
 
1,769

 
111

 
1,880

 
1,960

 
272

 
2,232

Total
 
$
65,194

 
$
22,646

 
$
87,840

 
$
74,066

 
$
32,606

 
$
106,672


Accounts Receivable
Accounts receivable as of September 30, 2019 and December 31, 2018 consisted of the following:
 
 
September 30, 2019
 
December 31, 2018
 
 
(in thousands)
Accounts receivable - third parties
 
$
6,553

 
$
5,342

Accounts receivable - affiliated mutual funds and collective investment trusts
 
4,214

 
6,105

Total accounts receivable
 
$
10,767

 
$
11,447

Accounts receivable represents the Company's unconditional rights to consideration arising from its performance under separately managed account, mutual fund and collective investment trust, distribution and shareholder servicing, and custodial service contracts. Accounts receivable balances do not include an allowance for doubtful accounts nor has any significant bad debt expense attributable to accounts receivable been recorded during the three and nine months ended September 30, 2019 or 2018.

11

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Advisory and Distribution Agreements
The Company earns investment advisory fees, distribution fees and administrative service fees under agreements with affiliated mutual funds and collective investment trusts. Fees earned for advisory and distribution services provided were approximately $9.8 million and $31.1 million for the three and nine months ended September 30, 2019, respectively, and approximately $13.8 million and $42.6 million for the three and nine months ended September 30, 2018, respectively, which represents greater than 25% of revenue in each period. The following provides amounts due from affiliated mutual funds and collective investment trusts reported within accounts receivable in the consolidated statements of financial condition as of September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
December 31, 2018
 
 
(in thousands)
Affiliated mutual funds
 
$
2,963

 
$
4,802

Affiliated collective investment trusts
 
1,251

 
1,303

Accounts receivable - affiliated mutual funds and collective investment trusts
 
$
4,214

 
$
6,105


Contract assets and liabilities
Accrued accounts receivable: Accrued accounts receivable represents the Company's contract asset for revenue that has been recognized in advance of billing separately managed account contracts. Consideration for the period billed in arrears is dependent on the client’s AUM on a future billing date and therefore conditional as of the reporting period end. During the nine months ended September 30, 2019, revenue was increased by less than $0.1 million for changes in transaction price. Accrued accounts receivable of approximately $0.3 million and $0.2 million is reported within prepaid expenses and other assets in the consolidated statements of financial condition as of September 30, 2019 and December 31, 2018, respectively.
Deferred revenue: Deferred revenue is recorded when consideration is received or unconditionally due in advance of providing services to the Company's customer. Revenue recognized during the nine months ended September 30, 2019 that was included in deferred revenue at the beginning of the period was approximately $8.8 million.
Costs to obtain a contract: Incremental first year commissions directly associated with new separate account and collective investment trust contracts are capitalized and amortized straight-line over an estimated customer contract period of 7 years for separate accounts and 3 years for collective investment trust contracts. The total net asset as of both September 30, 2019 and December 31, 2018 was approximately $1.1 million. The related amortization expense, which is included in compensation and related costs, totaled approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2019 ,and approximately $0.1 million and $0.4 million for the three and nine months ended September 30, 2018, respectively. An impairment loss is recorded for contract acquisition costs related to client contracts that cancel during the period. These impairment losses totaled less than $0.1 million for both the three and nine months ended September 30, 2019 and also for the three months ended September 30, 2018. For the nine months ended September 30, 2018, these impairment losses totaled approximately $0.1 million.
Note 4—Noncontrolling Interests
Manning & Napier holds an economic interest of approximately 18.9% in Manning & Napier Group, but as managing member controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining approximately 81.1% economic interest in Manning & Napier Group held by M&N Group Holdings and MNCC. Net income attributable to noncontrolling interests on the statements of operations represents the portion of earnings attributable to the economic interest in Manning & Napier Group held by the noncontrolling interests.

12

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following provides a reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.”:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Income before provision for income taxes
 
$
6,727

 
$
5,252

 
$
13,436

 
$
19,685

Less: income (loss) before provision for income taxes of Manning & Napier, Inc. (1)
 
(388
)
 
97

 
(207
)
 
356

Income before provision for income taxes, as adjusted
 
7,115

 
5,155

 
13,643

 
19,329

Controlling interest percentage (2)
 
18.9
%
 
18.2
%
 
18.8
%
 
18.2
%
Net income attributable to controlling interest
 
1,341

 
941

 
2,562

 
3,514

Plus: income (loss) before provision for income taxes of Manning & Napier, Inc. (1)
 
(388
)
 
97

 
(207
)
 
356

Income before income taxes attributable to Manning & Napier, Inc.
 
953

 
1,038

 
2,355

 
3,870

Less: provision for income taxes of Manning & Napier, Inc.(3)
 
129

 
258

 
556

 
1,110

Net income attributable to Manning & Napier, Inc.
 
$
824

 
$
780

 
$
1,799

 
$
2,760

________________________
(1)
Manning & Napier, Inc. incurs certain income or expenses that are only attributable to it and are therefore excluded from the net income attributable to noncontrolling interests.
(2)
Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc. The amount represents the Company's weighted ownership of Manning & Napier Group for the respective periods.
(3)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes was $0.2 million and $0.7 million for the three and nine months ended September 30, 2019, respectively, and $0.3 million and $1.2 million for the three and nine months ended September 30, 2018, respectively.

As of September 30, 2019, a total of 62,034,200 units of Manning & Napier Group were held by the noncontrolling interests. Pursuant to the terms of the exchange agreement entered into at the time of the Company's initial public offering ("Exchange Agreement"), such units may be exchangeable for shares of the Company's Class A common stock. For any units exchanged, the Company will (i) pay an amount of cash equal to the number of units exchanged multiplied by the value of one share of the Company's Class A common stock less a market discount and expected expenses, or, at the Company's election, (ii) issue shares of the Company's Class A common stock on a one-for-one basis, subject to customary adjustments. As the Company receives units of Manning & Napier Group that are exchanged, the Company's ownership of Manning & Napier Group will increase.
During the nine months ended September 30, 2019, M&N Group Holdings and MNCC exchanged a total of 1,315,521 Class A units of Manning & Napier Group for approximately $3.1 million in cash. Subsequent to the exchange the Class A units were retired, resulting in an increase in Manning & Napier's ownership in Manning & Napier Group. In addition, during the nine months ended September 30, 2019, Class A common stock was issued under the Company's 2011 Equity Compensation Plan (the "Equity Plan") for which Manning & Napier, Inc. acquired an equivalent number of Class A units of Manning & Napier Group, net of forfeitures of unvested restricted stock awards.

13

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following is the impact to the Company's equity ownership interest in Manning & Napier Group for the nine months ended September 30, 2019:
 
Manning & Napier Group Class A Units Held
 
 
 

Manning & Napier
 
 
Noncontrolling Interests
 
Total
 
Manning & Napier Ownership %
As of December 31, 2018
14,126,736

 
63,349,721

 
77,476,457

 
18.2%
Class A Units issued
351,532

 

 
351,532

 
0.4%
Class A Units exchanged

 
(1,315,521
)
 
(1,315,521
)
 
0.3%
As of September 30, 2019
14,478,268

 
62,034,200

 
76,512,468

 
18.9%
Since the Company continues to have a controlling interest in Manning & Napier Group, the aforementioned changes in ownership of Manning & Napier Group were accounted for as equity transactions under ASC 810, Consolidation. Additional paid-in capital and noncontrolling interests in the consolidated statements of financial position are adjusted to reallocate the Company's historical equity to reflect the change in ownership of Manning & Napier Group.
At September 30, 2019 and December 31, 2018, the Company had recorded a liability of $18.2 million and $18.0 million, respectively, representing the estimated payments due to the selling unit holders under the tax receivable agreement ("TRA") entered into between Manning & Napier and the other holders of Class A Units of Manning & Napier Group. Of these amounts, $0.7 million were included in accrued expenses and other liabilities at both September 30, 2019 and December 31, 2018. The Company made no payments pursuant to the TRA during the nine months ended September 30, 2019 and approximately $2.5 million during the nine months ended September 30, 2018.
Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interests. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.
Note 5—Investment Securities
The following represents the Company’s investment securities holdings as of September 30, 2019 and December 31, 2018:
 
 
September 30, 2019
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes
 
$
26,958

 
$
160

 
$

 
$
27,118

Fixed income securities
 
24,918

 
24

 

 
24,942

Short-term investments
 
3,032

 

 

 
3,032

 
 
 
 
 
 
 
 
55,092

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
5,533

Mutual funds
 
 
 
 
 
 
 
4,033

 
 
 
 
 
 
 
 
9,566

Total investment securities
 
 
 
 
 
 
 
$
64,658


14

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

 
 
December 31, 2018
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes
 
$
21,613

 
$
36

 
$

 
$
21,649

Fixed income securities
 
15,488

 

 
(75
)
 
15,413

Short-term investments
 
45,879

 

 

 
45,879

 
 
 
 
 
 
 
 
82,941

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
4,683

Mutual funds
 
 
 
 
 
 
 
3,566

 
 
 
 
 
 
 
 
8,249

Total investment securities
 
 
 
 
 
 
 
$
91,190

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds for which the Company provides advisory services. At September 30, 2019 and December 31, 2018, trading securities consist of investments held by the Company to provide initial cash seeding for product development purposes and investments in mutual funds to hedge economic exposure to market movements on its deferred compensation plan. The Company recognized approximately $1.1 million of net unrealized gains and $0.2 million of net unrealized losses related to investments classified as trading during the nine months ended September 30, 2019 and 2018, respectively.
Investment securities classified as available-for-sale consist of U.S. Treasury notes, corporate bonds and other short-term investments to optimize cash management opportunities and for compliance with certain regulatory requirements. As of September 30, 2019 and December 31, 2018, approximately $0.6 million of these securities was considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the nine months ended September 30, 2019 and 2018.
Note 6—Fair Value Measurements
Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is applied that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1—observable inputs such as quoted prices in active markets for identical securities;
Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

15

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following table summarizes the hierarchy of inputs used to derive the fair value of the Company’s assets as of September 30, 2019 and December 31, 2018: 
 
 
September 30, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
5,533

 
$

 
$

 
$
5,533

Fixed income securities
 

 
24,942

 

 
24,942

Mutual funds
 
4,033

 

 

 
4,033

U.S. Treasury notes
 

 
27,118

 

 
27,118

Short-term investments
 

 
3,032

 

 
3,032

Total assets at fair value
 
$
9,566

 
$
55,092

 
$

 
$
64,658

 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$

 
$

Total liabilities at fair value
 
$

 
$

 
$

 
$

 
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
4,683

 
$

 
$

 
$
4,683

Fixed income securities
 

 
15,413

 

 
15,413

Mutual funds
 
3,566

 

 

 
3,566

U.S. Treasury notes
 

 
21,649

 

 
21,649

Short-term investments
 
43,914

 
1,965

 

 
45,879

Total assets at fair value
 
$
52,163

 
$
39,027

 
$

 
$
91,190

 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$

 
$

Total liabilities at fair value
 
$

 
$

 
$

 
$


Short-term investments consists of certificate of deposits that are stated at cost, which approximate fair value due to the short maturity of the investments and U.S. Treasury bills.
Valuations of investments in fixed income securities, U.S. Treasury notes and U.S. Treasury bills can generally be obtained through independent pricing services. For most bond types, the pricing service utilizes matrix pricing, which considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type and current day trade information, as well as dealer supplied prices. These valuations are categorized as Level 2 in the hierarchy.
Contingent consideration was a component of the purchase price of Rainier in 2016 of additional cash payments of up to $32.5 million over the period ending December 31, 2019, contingent upon Rainier's achievement of certain financial targets. The fair value of the contingent consideration is calculated on a quarterly basis by forecasting Rainier’s adjusted earnings before interest, taxes and amortization over the contingency period. There were no changes in contingent consideration liability measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2019.
The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between valuation levels during the nine months ended September 30, 2019.

16

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 7—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of September 30, 2019 and December 31, 2018 consisted of the following:
 
 
September 30, 2019
 
December 31, 2018
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
9,304

 
$
16,121

Accrued payroll and benefits
 
3,663

 
4,087

Accrued sub-transfer agent fees
 
531

 
1,451

Dividends payable
 
312

 
306

Amounts payable under tax receivable agreement
 
701

 
674

Short-term operating lease liabilities
 
2,460

 

Other accruals and liabilities
 
3,271

 
2,487

Total accrued expenses and other liabilities
 
$
20,242

 
$
25,126

During the year ended December 31, 2018, the Company commenced a voluntary employee retirement offering (the "offering"), available to employees meeting certain age and length-of-service requirements as well as business function criteria. Employees that elected to participate in the offering, subject to approval by the Company, received enhanced separation benefits. These employees are required to render service until their agreed upon termination date in order to receive benefits under the offering. As such, the liability is recognized ratably over the applicable service period, which may vary from person to person.
Total employee severance costs under the offering are approximately $2.6 million, of which approximately $2.2 million was recognized during the year ended December 31, 2018. During the nine months ended September 30, 2019, the Company recognized severance costs of approximately $0.2 million under the offering and approximately $1.4 million as a result of involuntary workforce reductions. Employee severance costs recognized are included in compensation and related costs in the consolidated statements of operations.
The following table summarizes the changes in accrued employee severance costs recognized by the Company during the nine months ended September 30, 2019, as included in accrued expenses and other liabilities in the consolidated statements of financial condition:
 
 
Nine months ended September 30, 2019
 
 
(in thousands)
Accrued employee severance costs as of December 31, 2018
 
$
1,642

Employee severance costs recognized
 
1,681

Payment of employee severance costs
 
(2,579
)
Accrued employee severance costs as of September 30, 2019
 
$
744

Note 8—Leases
Adoption of ASU 2016-02, Leases (Topic 842)
On January 1, 2019, the Company adopted Topic 842 using the optional transition method. Consequently, financial information and disclosures for the reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting policies under Topic 840.
Topic 842 provides a number of optional practical expedients as part of the transition from Topic 840. The Company elected the ‘package of practical expedients’, which permits it to not reassess, under Topic 842, its prior conclusions about lease identification, lease classification and initial direct costs.
Topic 842 also provides practical expedients for an entity’s ongoing accounting under Topic 842. The Company elected the short-term lease recognition exemption for all leases that qualify, and elected the practical expedient to combine lease and non-lease components as a single combined lease component for all of its leases.
On adoption, the Company recognized lease liabilities of approximately $23.2 million and right-of-use assets for approximately $20.6 million, based on the present value of the remaining minimum rental payments under Topic 840 for operating leases that existed as of the date of adoption. In addition, the Company wrote-down approximately $2.6 million of

17

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

unamortized deferred lease costs and tenant incentives previously recorded as deferred rent liability in the consolidated statements of financial condition as of December 31, 2018. The Company recognized an increase to opening shareholders' equity and noncontrolling interest of approximately $0.1 million, as of January 1, 2019, related to the deferred tax impacts of adopting Topic 842.
Leases
The Company has operating and finance leases for office space and certain equipment. For these leases, the office space or equipment is an explicitly identified asset within the contract. The Company has determined that it has obtained substantially all of the economic benefits from the use of the underlying asset and directs how and for what purpose the asset is used during the term of the contract.
The Company's leases have remaining lease terms ranging between approximately 1 year and 9 years. The Company's lease term on certain of its multi-year office space leases, including its headquarters, include options for the Company to extend those leases for periods ranging from an additional five to ten years. In addition, the Company has the option to reduce a portion of its square footage at certain times throughout the term of the lease for its headquarters. The Company determined it is not reasonably certain at this time it will exercise the options to extend these leases or will exercise the options to reduce its square footage; therefore, the payment amounts related to these lease term extensions and contraction options have been excluded from determining its right-of-use asset and lease liability.
Certain of the Company's operating leases for office space include variable lease payments, including non-lease components (such as utilities and operating expenses) that vary based on actual expenses and are adjusted on an annual basis. The Company concluded that these variable lease payments are in substance fixed payments and included the estimated variable payments in its determination of right-of-use assets and lease liabilities.
Changes in the lease terms, including renewal options and options to reduce its square footage, incremental borrowing rates, and/or variable lease payments, and the corresponding impact to the right-of-use assets and lease liabilities, are recognized in the period incurred.
Certain of the Company's operating leases have been subleased for which the Company will receive cash totaling approximately $3.9 million over the remaining term of such leases. The lease terms for the three subleased operating leases end in 2021, 2027 and 2028.
The components of lease expense for the three and nine months ended September 30, 2019 were as follows:
 
 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
 
 
(in thousands)
Finance lease expense
 
 
 
 
Amortization of right-of-use assets
 
$
34

 
$
93

Interest on lease liabilities
 
4

 
9

Operating lease expense
 
904

 
2,762

Short-term lease expense
 
3

 
10

Variable lease expense
 
139

 
250

Sublease income
 
(224
)
 
(521
)
Total lease expense
 
$
860

 
$
2,603











18

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)


Supplemental cash flow information related to leases for the three and nine months ended September 30, 2019 were as follows:
 
 
Three months ended September 30, 2019
 
Nine months ended September 30, 2019
 
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from finance leases
 
$
3

 
$
8

Finance cash flows from finance leases
 
$
34

 
$
96

Operating cash flows from operating leases
 
$
1,132

 
$
3,085

 
 
 
 
 
Right-of-use assets obtained in exchange for new lease obligations:
 
 
 
 
Finance leases
 
$

 
$
175

Operating leases
 
$
(104
)
 
$
761

Supplemental balance sheet information related to leases as of September 30, 2019 was as follows:
(in thousands, except lease term and discount rate)
 
September 30, 2019
Finance Leases
 
 
Finance lease right-of-use assets (1)
 
$
235

 
 
 
Accrued expenses and other liabilities
 
$
110

Other long-term liabilities
 
137

Total finance lease liabilities
 
$
247

 
 
 
Operating Leases
 
 
Operating lease right-of-use assets
 
$
19,325

 
 
 
Accrued expenses and other liabilities
 
$
2,460

Operating lease liabilities, non-current
 
19,321

Total operating lease liabilities
 
$
21,781

 
 
 
Weighted average remaining lease term
 
 
Finance leases
 
2.88 years

Operating leases
 
7.68 years

Weighted average discount rate
 
 
Finance leases
 
4.53
%
Operating leases
 
5.15
%
_______________________
(1)
Amounts included in other long-term assets within the consolidated statements of financial condition.

19

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)


Maturities of lease liabilities were as follows:
Twelve month period ending September 30,
 
Finance Leases
 
Operating Leases
 
 
(in thousands)
2020
 
$
119

 
$
3,514

2021
 
63

 
3,722

2022
 
48

 
3,481

2023
 
27

 
3,185

2024
 
7

 
3,118

Thereafter
 

 
9,408

Total lease payments
 
264

 
26,428

Less imputed interest
 
(17
)
 
(4,647
)
Total lease liabilities
 
$
247

 
$
21,781

As of December 31, 2018, minimum rent payments relating to the office leases for each of the following five years and thereafter were as follows: 
Year Ending December 31,
 
Minimum Payments
 
 
(in thousands)
2019
 
$
3,748

2020
 
3,780

2021
 
3,712

2022
 
3,668

2023
 
3,369

Thereafter
 
13,397

Total undiscounted lease payments
 
$
31,674

Note 9—Commitments and Contingencies
The Company may from time to time enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.
Regulation
As an investment adviser to a variety of investment products, the Company and its affiliated broker-dealer are subject to routine reviews and inspections by the SEC and the Financial Industry Regulatory Authority, Inc. Additionally, the Company could be subject to non-routine reviews and inspections by the National Futures Association and U.S. Commodity Futures Trading Commission in regards to the Company’s de minimis exposure to commodity interest investments in the mutual funds and collective investment trust vehicles it operates. From time to time the Company may also be subject to claims, or be involved in various legal proceedings, arising in the ordinary course of its business and other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is difficult to predict. The Company will establish accruals for matters that are probable, can be reasonably estimated, and may take into account any related insurance recoveries to the extent of such recoveries. As of September 30, 2019 and December 31, 2018, the Company has not accrued for any such claims, legal proceedings, or other contingencies.
Note 10—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed using the two-class method to determine net income available to Class A common stock. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company's restricted Class A common shares granted under the Equity Plan have non-forfeitable dividend rights during their vesting period and are therefore considered participating securities under the two-class method. Under the two-class method, the Company's net income available to Class A common stock is reduced by the amount allocated to the unvested restricted Class A common

20

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

stock. Basic EPS is calculated by dividing net income available to Class A common stock by the weighted average number of common shares outstanding during the period.
Diluted earnings per share (“diluted EPS”) is computed under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, the weighted average number of common shares outstanding during the period is increased by the assumed conversion into Class A common stock of the unvested equity awards and the exchangeable Class A units of Manning & Napier Group, to the extent that such conversion would dilute earnings per share.
The following is a reconciliation of the income and share data used in the basic and diluted EPS computations for the three and nine months ended September 30, 2019 and 2018 under the two-class method:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
6,577

 
$
4,978

 
$
12,713

 
$
18,441

Less: net income attributable to noncontrolling interests
 
5,753

 
4,198

 
10,914

 
15,681

Net income attributable to Manning & Napier, Inc.
 
$
824

 
$
780

 
$
1,799

 
$
2,760

Less: allocation to participating securities
 

 
47

 
(42
)
 
142

Net income available to Class A common stock
 
$
824

 
$
733

 
$
1,841

 
$
2,618

 
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
15,290,595

 
14,740,541

 
15,163,205

 
14,583,570

Dilutive effect of unvested equity awards
 
310,091

 
6,568

 
303,134

 
13,973

Dilutive effect of exchangeable Class A Units
 

 
63,349,721

 

 
63,537,114

Weighted average shares of Class A common stock outstanding - diluted
 
15,600,686

 
78,096,830

 
15,466,339

 
78,134,657

Net income available to Class A common stock per share - basic
 
$
0.05

 
$
0.05

 
$
0.12

 
$
0.18

Net income available to Class A common stock per share - diluted
 
$
0.05

 
$
0.05

 
$
0.12

 
$
0.18

For the three and nine months ended September 30, 2019, 3,000,000 unvested performance-based stock options were excluded from the calculation of diluted EPS because the associated market condition had not yet been achieved.
For the three and nine months ended September 30, 2019, 951,060 and 1,201,060, respectively, unvested equity awards were excluded from the calculation of diluted EPS because the effect would have been anti-dilutive. For the three and nine months ended September 30, 2018, 592,500 and 661,250, respectively, unvested equity awards were excluded from the calculation of diluted EPS because the effect would have been anti-dilutive.
At September 30, 2019 there were 62,034,200 Class A Units of Manning & Napier Group outstanding which, subject to certain restrictions, may be exchangeable for up to an equivalent number of shares of the Company's Class A common stock. These units were not included in the calculation of diluted earnings per common share for the three and nine-months ended September 30, 2019 because the effect would have been anti-dilutive.
Note 11—Equity Based Compensation
The Equity Plan was adopted by the Company's board of directors and approved by shareholders prior to the consummation of the Company's 2011 initial public offering. Under the Equity Plan, a total of 13,142,813 equity interests are authorized for issuance, and may be issued in the form of Class A common stock, restricted stock units, stock options, units of Manning & Napier Group, or certain classes of membership interests in the Company which may convert into units of Manning & Napier Group.

21

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following table summarizes activity related to awards of restricted stock and restricted stock units (collectively, "stock awards") under the Equity Plan for the nine months ended September 30, 2019:
 
 
Stock Awards
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019
 
1,602,337

 
$
5.31

Granted
 
770,571

 
$
2.38

Vested
 
(566,115
)
 
$
5.58

Forfeited
 
(137,321
)
 
$
5.50

Outstanding at September 30, 2019
 
1,669,472

 
$
3.85

The weighted average fair value of stock awards granted during the nine months ended September 30, 2019 was $2.38, based on the closing sale price of the Company's Class A common stock as reported on the New York Stock Exchange on the date of grant, and, if not entitled to dividends or dividend equivalents during the vesting period, reduced by the present value of such amounts expected to be paid on the underlying shares during the requisite service period.
For the three and nine months ended September 30, 2019, the Company recorded approximately $0.5 million and $2.4 million, respectively, of compensation expense related to stock awards under the Equity Plan. For the three and nine months ended September 30, 2018, the Company recorded approximately $0.5 million and $2.1 million, respectively, of compensation expense related to stock awards under the Equity Plan. The aggregate intrinsic value of stock awards that vested during the nine months ended September 30, 2019 and 2018 was approximately $1.3 million and $1.7 million, respectively. As of September 30, 2019, there was unrecognized compensation expense of approximately $3.8 million related to stock awards, which the Company expects to recognize over a weighted average period of approximately 1.8 years.
In connection with the vesting of restricted stock units during the nine-months ended September 30, 2019, the Company withheld a total of 38,978 shares of Class A common stock to satisfy approximately $0.1 million of employee income tax withholding requirements. These net share settlements had the effect of shares repurchased and retired by the Company, as they reduced the total number of Class A common shares outstanding.
A summary of activity under the Equity Plan related to stock option awards during the nine months ended September 30, 2019 is presented below:
 
 
Stock Option Awards