UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR |
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☐ |
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: 001-38980
ASSETMARK FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
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30-0774039 (I.R.S. Employer Identification Number) |
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1655 Grant Street, 10th Floor Concord, California 94520 (Address of principal executive offices) |
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(925) 521-2200 (Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
Common stock, par value $0.001 per share |
AMK |
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, 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 |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 ☒
As of April 30, 2020, the number of shares of the registrant’s common stock outstanding was 72,390,080.
ASSETMARK FINANCIAL HOLDINGS, INC.
TABLE OF CONTENTS
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Page No. |
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2 |
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Item 1. |
3 |
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Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 |
3 |
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4 |
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5 |
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Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 |
6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
Item 3. |
30 |
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Item 4. |
31 |
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Item 1. |
32 |
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Item 1A. |
32 |
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Item 2. |
52 |
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Item 3. |
52 |
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Item 4. |
52 |
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Item 5. |
52 |
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Item 6. |
53 |
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54 |
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology that conveys uncertainty of future events or outcomes. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance and financial results, our anticipated growth strategies and anticipated trends in our business, our expectations regarding our industry outlook, market position, liquidity and capital resources, acquisition targets, addressable market, investments in new products, services and capabilities, our ability to close and execute on strategic transactions, our ability to comply with existing, modified and new laws and regulations applying to our business, and the impacts of the COVID-19 pandemic on our operations, demand from our customers and end investors and our operating results. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed in section titled “Risk Factors.” Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results or revised expectations, except as required by law. In addition, “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements as predictions of future events.
2
AssetMark Financial Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands except share data and par value)
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March 31, 2020 |
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December 31, 2019 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
80,161 |
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$ |
96,341 |
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Restricted cash |
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8,500 |
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9,000 |
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Investments, at fair value |
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6,888 |
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7,275 |
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Fees and other receivables, net |
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12,199 |
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9,679 |
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Income tax receivable, net |
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5,878 |
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3,994 |
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Other current assets |
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12,135 |
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6,565 |
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Total current assets |
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125,761 |
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132,854 |
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Property, plant and equipment, net |
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7,207 |
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7,067 |
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Capitalized software, net |
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69,372 |
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69,814 |
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Other intangible assets, net |
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660,089 |
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651,915 |
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Operating lease right-of-use assets |
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32,682 |
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— |
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Goodwill |
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338,623 |
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327,310 |
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Total assets |
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$ |
1,233,734 |
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$ |
1,188,960 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
600 |
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$ |
967 |
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Accrued liabilities and other current liabilities |
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34,767 |
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40,610 |
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Total current liabilities |
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35,367 |
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41,577 |
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Long-term debt, net |
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121,770 |
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121,692 |
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Other long-term liabilities |
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14,480 |
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16,440 |
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Long-term portion of operating lease liabilities |
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36,608 |
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— |
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Deferred income tax liabilities, net |
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150,724 |
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150,390 |
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Total long-term liabilities |
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323,582 |
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288,522 |
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Total liabilities |
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358,949 |
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330,099 |
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Commitments and contingencies |
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— |
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— |
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Stockholders’ equity: |
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Common stock, $0.001 par value (675,000,000 shares authorized and 72,390,080 shares issued and outstanding as of March 31, 2020 and December 31, 2019) |
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72 |
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72 |
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Additional paid-in capital |
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809,594 |
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796,406 |
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Retained earnings |
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65,119 |
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62,383 |
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Total stockholders’ equity |
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874,785 |
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858,861 |
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Total liabilities and stockholders’ equity |
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$ |
1,233,734 |
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$ |
1,188,960 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
AssetMark Financial Holdings, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands except share and per share data)
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Three Months Ended March 31, |
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2020 |
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2019 |
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Revenue: |
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Asset-based revenue |
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$ |
105,650 |
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$ |
83,063 |
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Spread-based revenue |
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7,951 |
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7,549 |
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Other revenue |
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1,289 |
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1,702 |
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Total revenue |
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114,890 |
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92,314 |
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Expenses: |
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Asset-based expenses |
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35,015 |
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28,102 |
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Spread-based expenses |
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1,289 |
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478 |
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Employee compensation |
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43,497 |
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31,885 |
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General and operating expenses |
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19,365 |
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12,292 |
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Professional fees |
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3,831 |
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2,386 |
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Depreciation and amortization |
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8,409 |
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6,896 |
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Total expenses |
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111,406 |
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82,039 |
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Interest expense |
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1,627 |
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4,024 |
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Other expense |
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50 |
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— |
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Income before income taxes |
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1,807 |
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6,251 |
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Provision for (benefit from) income taxes |
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(929 |
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3,440 |
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Net income |
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2,736 |
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2,811 |
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Unrealized gain on investments, net of tax |
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— |
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16 |
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Net comprehensive income |
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$ |
2,736 |
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$ |
2,827 |
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Net income per share attributable to common shareholder: |
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Net income per share, basic and diluted |
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$ |
0.04 |
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$ |
0.04 |
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Weighted average number of common shares outstanding, basic |
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67,142,459 |
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66,150,000 |
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Weighted average number of common shares outstanding, diluted |
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69,317,261 |
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66,150,000 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
4
AssetMark Financial Holdings, Inc.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
For the three months ended March 31, 2020 and 2019
(in thousands except share data)
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Common stock |
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Additional paid-in |
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Retained |
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Accumulated other comprehensive |
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Total stockholders’ |
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Shares |
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Amount |
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capital |
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earnings |
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income |
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equity |
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Balance at December 31, 2018 |
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66,150,000 |
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$ |
66 |
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$ |
635,096 |
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$ |
63,846 |
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$ |
3 |
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$ |
699,011 |
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Net income |
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— |
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— |
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— |
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2,811 |
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— |
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2,811 |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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16 |
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16 |
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Share-based employee compensation |
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— |
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— |
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5,226 |
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— |
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— |
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5,226 |
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Balance at March 31, 2019 |
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66,150,000 |
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$ |
66 |
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$ |
640,322 |
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$ |
66,657 |
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$ |
19 |
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$ |
707,064 |
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Balance at December 31, 2019 |
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72,390,080 |
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$ |
72 |
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$ |
796,406 |
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$ |
62,383 |
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$ |
— |
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$ |
858,861 |
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Net income |
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— |
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— |
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— |
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2,736 |
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— |
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2,736 |
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Share-based employee compensation |
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— |
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— |
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13,188 |
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— |
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— |
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13,188 |
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Balance at March 31, 2020 |
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72,390,080 |
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$ |
72 |
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$ |
809,594 |
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$ |
65,119 |
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$ |
— |
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$ |
874,785 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
5
AssetMark Financial Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
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Three Months Ended March 31, |
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2020 |
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2019 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
2,736 |
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$ |
2,811 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
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8,409 |
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6,896 |
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Interest |
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78 |
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172 |
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Deferred income taxes |
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522 |
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(132 |
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Share-based compensation |
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13,188 |
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5,226 |
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Changes in certain assets and liabilities: |
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Fees and other receivables, net |
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(1,835 |
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(3,755 |
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Other current assets |
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944 |
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(815 |
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Accounts payable, accrued expenses and other liabilities |
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(12,909 |
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(10,694 |
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Income tax receivable and payable |
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(1,884 |
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3,060 |
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Net cash provided by operating activities |
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9,249 |
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2,769 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of OBS, net of cash received |
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(18,404 |
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— |
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Purchase of investments |
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(1,014 |
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(308 |
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Purchase of property and equipment |
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(416 |
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(93 |
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Purchase of computer software |
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(6,095 |
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(4,619 |
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Net cash used in investing activities |
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(25,929 |
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(5,020 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Payments on long-term debt |
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— |
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(625 |
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Net cash (used in) provided by financing activities |
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— |
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(625 |
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Net change in cash, cash equivalents, and restricted cash |
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(16,680 |
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(2,876 |
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Cash, cash equivalents, and restricted cash at beginning of period |
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105,341 |
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112,354 |
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Cash, cash equivalents, and restricted cash at end of period |
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$ |
88,661 |
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$ |
109,478 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Income taxes paid |
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$ |
365 |
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$ |
— |
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Interest paid |
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$ |
1,547 |
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$ |
3,852 |
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Non-cash operating activities: |
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— |
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Non-cash changes to right-of-use assets |
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$ |
38,495 |
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$ |
— |
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Non-cash changes to lease liabilities |
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$ |
39,839 |
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$ |
— |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
All dollar amounts presented are in thousands other than per share amounts.
Note 1. Organization and Nature of Business
These unaudited condensed consolidated financial statements include AssetMark Financial Holdings, Inc. and its subsidiaries, which include AssetMark Financial, Inc., which is the parent company of AssetMark, Inc., AssetMark Trust Company, AssetMark Brokerage, LLC, AssetMark Retirement Services, Inc., Global Financial Private Capital, Inc., Global Financial Advisory, LLC, WBI OBS Financial, LLC, OBS Financial, Inc. and OBS Financial Services, Inc. (collectively, the “Company”).
The Company’s legal entity structure as of March 31, 2020 was as follows:
The Company offers a broad array of wealth management solutions to individual investors through financial advisers by providing an open-architecture product platform along with tailored client advice, asset allocation options, practice management, support services and technology to the financial adviser channel.
AssetMark Trust Company (“ATC”) is a licensed trust company incorporated under the laws of the State of Arizona on August 24, 1994 and regulated by the Arizona Department of Financial Institutions. ATC provides custodial recordkeeping services primarily to investor clients of registered investment advisers (including AMI) located throughout the United States.
AssetMark, Inc. (“AMI”) is a registered investment adviser that was incorporated under the laws of the State of California on May 13, 1999. AMI offers a broad array of wealth management solutions to individual investors through financial advisers by
7
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
providing an open-architecture product platform along with tailored client advice, asset allocation options, practice management, support services and technology solutions to the financial adviser channel. AMI serves as investment adviser to the Company’s proprietary GuideMark Funds, GuidePath Funds and the Savos Dynamic Hedging Fund, each of which is a mutual fund offered to clients of financial advisers.
AssetMark Retirement Services, Inc. (“ARS”), formerly known as Aris Corporation of America, was incorporated under the laws of the State of Pennsylvania on April 30, 1974. ARS serves as the record-keeper and third-party administrator for the Aris Retirement product, which are 401(k) or 403(b) investment offerings utilized by small businesses.
AssetMark Brokerage, LLC (“AMB”) is a limited-purpose broker-dealer located in Concord, California and was incorporated under the laws of the State of Delaware on September 25, 2013. AMB’s primary function is to distribute the mutual funds of the Company and to sponsor the FINRA licensing of those AssetMark associates who provide distribution support through promotion of the AssetMark programs and strategies that employ the Company’s mutual funds.
Global Financial Private Capital, Inc. (“GFPC”), formerly known as Global Financial Private Capital, LLC and renamed effective July 12, 2019, is a registered investment adviser that was incorporated under the laws of the State of Florida on June 7, 2004. GFPC provides a broad suite of integrated wealth management services for institutional and individual investors.
Global Financial Advisory, LLC (“GFA”) is an insurance services company that was incorporated under the laws of the State of Delaware on June 30, 2016. GFA provides insurance services on an intermediary basis and is not a policy writer.
OBS Financial Services, Inc. (“OBS”) is a registed investment advisor that was incorporated under the laws of the State of Delaware on November 2, 2005. OBS provides a broad suite of integrated wealth management services for institutional and individual investors. WBI OBS Financial, LLC (“OBL”) is a limited liability company that was formed under the laws of the State of Ohio on October 6, 2011. OBL is a holding company whose only assets are the share of common stock of OBS Holdings, Inc. (“OBF”). OBF is a corporation that was incorporated under the laws of the State of Ohio on April 14, 2000. OBF is a holding company whose only assets are the shares of common stock of OBS. See Note 3 for additional details on the acquisition completed during the quarter ended March 31, 2020.
Note 2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for fair presentation have been included. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ended December 31, 2020 or any future period. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Risks and Uncertainties
The outbreak of COVID-19 has rapidly evolved into a pandemic and has adversely impacted global commercial activities. Given the uncertainty around the duration and extent of the COVID-19 pandemic, management cannot accurately predict at this time the potential impact on the Company’s results of operations, financial condition or liquidity, although management expects that it will adversely affect the Company’s operations and operating results in the second quarter for 2020 and subsequent periods.
Estimates and assumptions about future events and their effects on the Company cannot be determined with certainty and therefore require the exercise of judgment. The Company is not aware of any specific events or circumstances that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. The Company will update the estimates and assumptions underlying the consolidated financial statements in future periods as events and circumstances develop.
8
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Recent Accounting Pronouncements – Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new standard on January 1, 2020 using the modified retrospective transition method with certain available transitional practical expedients. The Company has elected to apply the short-term lease exemption to all of its classes of underlying assets. The standard had a material impact on the Company’s condensed consolidated balance sheets, but did not have an impact on the Company’s condensed consolidated statements of comprehensive income. The most significant impact was the recognition of right-to-use (“ROU”) assets and lease liabilities for operating leases. Adoption of the standard had no impact to previously reported results. The Company determines if an arrangement is a lease at inception. Operating leases are included in the other current assets, operating lease ROU assets, accrued liabilities and other current liabilities, and long-term portion of operating lease liabilities on the Company’s condensed consolidated balance sheets. The Company does not have material finance leases. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligations to make payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the remaining lease term. The Company uses an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. 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. The Company has elected the practical expedient to exclude the non-lease component as part of the lease component for all asset classes. The majority of the Company’s lease agreements are facility leases. The Company’s leases have a weighted-average lease term of 7.8 years and used a weighted-average discount rate of 3.63% as of March 31, 2020.
Future minimum lease payments under non-cancellable leases as of March 31, 2020 is as follows:
Remainder of 2020 |
|
$ |
2,906 |
|
2021 |
|
|
5,525 |
|
2022 |
|
|
5,873 |
|
2023 |
|
|
5,710 |
|
2024 |
|
|
6,084 |
|
2025 and thereafter |
|
|
19,662 |
|
Total |
|
$ |
45,760 |
|
In January 2017, the FASB issued ASU 2017-04, Intangibles, Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which removes step 2 from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company adopted the ASU on January 1, 2020 and it did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
In July 2018, the FASB issued ASU 2018-11, Lease (Topic 842) Targeted Improvements, which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The Company adopted the ASU on January 1, 2020 and it did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles, Goodwill and Other, Internal-Use Software (Subtopic 350-40), which provides guidance to evaluate the accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a license to internal-use-software, then the software license is accounted for by the customer in accordance with Subtopic ASC 350-40. An intangible asset is recognized for the software license and a liability also recognized. The Company adopted the ASU on January 1, 2020 and it did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
9
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
In October 2018, the FASB issued ASU 2018-17, Consolidation, Targeted Improvements to Related Party Guidance for Variable Interest Entities, which clarifies the determination as to whether a decision-making fee is a variable interest by requiring reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as an equivalent of a direct interest in its entirety. The Company adopted the ASU on January 1, 2020 and it did not have a significant impact on the Company’s consolidated financial statements and related disclosures.
Recent Accounting Pronouncements – Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in Topic 740 and improves consistent application of U.S. GAAP by clarifying and amending existing guidance. The new standard is effective for the Company on January 1, 2021, with early adoption permitted. The Company is currently evaluating the effect that ASU 2019-12 will have on its consolidated financial statements.
Note 3. Acquisition of WBI OBS Financial, LLC
On September 30, 2019, the Company entered into a unit purchase agreement to acquire WBI OBS Financial, LLC, subject to closing conditions that included approval from the Committee on Foreign Investment in the United States (“CFIUS”). On February 29, 2020, the Company closed the acquisition and paid a final purchase price of $21,496, net of working capital adjustments. The Company recorded goodwill of $11,313, adviser and trust relationships of $9,500 and deferred tax assets of $188 in connection with the acquisition.
Note 4. Goodwill and Intangible Assets
Goodwill
The Company’s goodwill balance was $338,623 and $327,310 as of March 31, 2020 and December 31, 2019, respectively. The Company, which has one reporting unit, performed an annual test for goodwill impairment in December for the years ended December 31, 2019 and 2018 and determined that goodwill was not impaired. The Company performed a qualitative test for goodwill impairment related to the COVID-19 pandemic and determined that an additional quantitative test was not necessary. Goodwill was not impaired as of March 31, 2020.
Intangible Assets
Information regarding the Company’s intangible assets is as follows:
March 31, 2020 |
|
Gross carrying amount |
|
|
Accumulated amortization |
|
|
Net carrying amount |
|
|
Estimated useful life |
|||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker-dealer relationships |
|
$ |
570,480 |
|
|
$ |
— |
|
|
$ |
570,480 |
|
|
|
Definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
45,830 |
|
|
|
(7,830 |
) |
|
|
38,000 |
|
|
17 years |
Broker-dealer license |
|
|
11,550 |
|
|
|
(1,973 |
) |
|
|
9,577 |
|
|
17 years |
ATC regulatory status |
|
|
23,300 |
|
|
|
(3,980 |
) |
|
|
19,320 |
|
|
17 years |
GFPC adviser relationships |
|
|
14,250 |
|
|
|
(975 |
) |
|
|
13,275 |
|
|
13 years |
OBS adviser and trust relationships |
|
|
9,500 |
|
|
|
(63 |
) |
|
|
9,437 |
|
|
12 years |
Total |
|
$ |
674,910 |
|
|
$ |
(14,821 |
) |
|
$ |
660,089 |
|
|
|
10
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019 |
|
Gross carrying amount |
|
|
Accumulated amortization |
|
|
Net carrying amount |
|
|
Estimated useful life |
|||
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker-dealer relationships |
|
$ |
570,480 |
|
|
$ |
— |
|
|
$ |
570,480 |
|
|
|
Definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
45,830 |
|
|
|
(7,256 |
) |
|
|
38,574 |
|
|
17 years |
Broker-dealer license |
|
|
11,550 |
|
|
|
(1,829 |
) |
|
|
9,721 |
|
|
17 years |
ATC regulatory status |
|
|
23,300 |
|
|
|
(3,689 |
) |
|
|
19,611 |
|
|
17 years |
GFPC adviser relationships |
|
|
14,250 |
|
|
|
(721 |
) |
|
|
13,529 |
|
|
13 years |
Total |
|
$ |
665,410 |
|
|
$ |
(13,495 |
) |
|
$ |
651,915 |
|
|
|
The weighted average estimated remaining useful life was 14.9 years for trade names, the broker-dealer license, ATC regulatory status, GFPC adviser relationships and OBS adviser and trust relationships as of March 31, 2020. Amortization expense for definite-lived intangible assets was $1,326 and $1,009 for the three months ended March 31, 2020 and 2019, respectively. The Company performed an annual test for intangible assets impairment in December for the years ended December 31, 2019 and 2018 and determined that intangible assets were not impaired. The Company performed a test for intangible assets impairment due to the COVID-19 pandemic and determined that intangible assets were not impaired as of March 31, 2020.
The expected future amortization expense for intangible assets as of March 31, 2020 is as follows:
Note 5. Accrued Liabilities and Other Current Liabilities
The following table shows the breakdown of accrued expenses and other current liabilities:
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
Accrued bonus |
|
$ |
6,157 |
|
|
$ |
17,209 |
|
Compensation and benefits payable |
|
|
7,821 |
|
|
|
7,591 |
|
Asset-based payables |
|
|
4,273 |
|
|
|
3,718 |
|
Other accrued expenses |
|
|
16,516 |
|
|
|
12,092 |
|
Total |
|
$ |
34,767 |
|
|
$ |
40,610 |
|
Note 6. Other Long-Term Liabilities
Other long-term liabilities consisted of the following:
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
Contractor liability |
|
$ |
2,805 |
|
|
$ |
3,083 |
|
Deferred compensation plan liability |
|
|
6,529 |
|
|
|
6,885 |
|
Purchase commitments related to acquisition of GFPC |
|
|
5,146 |
|
|
|
5,322 |
|
Deferred rent |
|
|
— |
|
|
|
1,150 |
|
Total |
|
$ |
14,480 |
|
|
$ |
16,440 |
|
11
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7. Fair Value Measurements
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value in the consolidated balance sheets as of March 31, 2020 and December 31, 2019, based on the three-tier fair value hierarchy:
|
|
March 31, 2020 |
|
|||||||||||||
|
|
Fair Value |
|
|
Level I |
|
|
Level II |
|
|
Level III |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment and alternative investment securities funds(1) |
|
$ |
359 |
|
|
$ |
359 |
|
|
$ |
— |
|
|
$ |
— |
|
Assets to fund deferred compensation liability(2) |
|
|
6,529 |
|
|
|
6,529 |
|
|
|
— |
|
|
|
— |
|
Total assets |
|
$ |
6,888 |
|
|
$ |
6,888 |
|
|
$ |
— |
|
|
$ |
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liability(3) |
|
$ |
6,529 |
|
|
$ |
6,529 |
|
|
$ |
— |
|
|
$ |
— |
|
Total liabilities |
|
$ |
6,529 |
|
|
$ |
6,529 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
December 31, 2019 |
|
|||||||||||||
|
|
Fair Value |
|
|
Level I |
|
|
Level II |
|
|
Level III |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment and alternative investment securities funds(1) |
|
$ |
390 |
|
|
$ |
390 |
|
|
$ |
— |
|
|
$ |
— |
|
Assets to fund deferred compensation liability(2) |
|
|
6,885 |
|
|
|
6,885 |
|
|
|
— |
|
|
|
— |
|
Total assets |
|
$ |
7,275 |
|
|
$ |
7,275 |
|
|
$ |
— |
|
|
$ |
— |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liability(3) |
|
$ |
6,885 |
|
|
$ |
6,885 |
|
|
$ |
— |
|
|
$ |
— |
|
Total liabilities |
|
$ |
6,885 |
|
|
$ |
6,885 |
|
|
$ |
— |
|
|
$ |
— |
|
(1) |
The fair value of the Company’s rabbi trust, which is comprised of equity investment and alternative investment securities funds, is based on the month-end quoted market prices for the net asset value of the various funds and securities, which mature on a daily basis. |
(2) |
The deferred compensation asset fair value is based on the month-end quoted market prices for the net asset value of the various investment funds. The Company recognized unrealized (loss) gains of $(1,370) and $1,089 related to this asset within the statements of income and comprehensive income for the three months ended March 31, 2020 and year ended December 31, 2019, respectively. |
(3) |
The deferred compensation liability is included in other non-current liabilities in the consolidated balance sheets and its fair market value is based on the month-end market prices for the net asset value of the various funds of the Company’s rabbi trust in which the participants have selected. The Company recognized other expenses of $(1,370) and $1,089 related to this liability within the statements of income and comprehensive income for the three months ended March 31, 2020 and the year ended December 31, 2019, respectively. |
Note 8. Asset-Based Expenses
Asset-based expenses incurred by the Company relating to the generation of asset-based revenues are as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Strategist and manager fees |
|
$ |
28,442 |
|
|
$ |
22,460 |
|
Premier broker-dealer fees |
|
|
3,059 |
|
|
|
2,092 |
|
Custody fees |
|
|
1,530 |
|
|
|
1,174 |
|
Fund advisory fees |
|
|
1,081 |
|
|
|
1,718 |
|
Marketing allowance |
|
|
903 |
|
|
|
515 |
|
External managers |
|
|
— |
|
|
|
142 |
|
Other |
|
|
— |
|
|
|
1 |
|
Total |
|
$ |
35,015 |
|
|
$ |
28,102 |
|
Note 9. Debt
On November 14, 2018, the Company executed a Credit Agreement with Credit Suisse AG for a $250,000 term loan (the “Term Loan”) and a revolving line of credit (the “Revolver”) that permits the Company to borrow up to $20,000. The Term Loan matures on November 14, 2025 and the Revolver matures on November 14, 2023. On July 26, 2019, the Company made a partial repayment of
12
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
$125 million of the Company’s outstanding indebtedness under the Term Loan. The repayment was considered a substantial modification and the debt was considered partially extinguished. As of March 31, 2020, $123.7 million aggregate principal amount of the Term Loan remained outstanding and the Revolver was undrawn. As of March 31, 2020, both the Term Loan and Revolver bear interest at the London InterBank Offered Rate (“LIBOR”) plus a margin of 3.0%. Interest expense was $1,627 and $4,024 for the three months ended March 31, 2020 and 2019, respectively.
Note 10. Share-Based Compensation
On July 3, 2019, the Company’s Board of Directors adopted, and the Company’s sole stockholder approved, the 2019 Equity Incentive Plan (the “2019 Equity Incentive Plan”), which became effective on July 17, 2019, the date of effectiveness of the Company’s IPO registration statement on Form S-1. As of March 31, 2020, 4,801,954 shares were available for issuance under the 2019 Equity Incentive Plan, which amount excluded the 85,737 shares of common stock subject to restricted stock units granted under the 2019 Equity Incentive Plan immediately following the pricing of the IPO.
Restricted Stock Awards
Prior to the liquidation and dissolution of AssetMark Holdings and the IPO, all officers and certain sales employees of AssetMark Holdings held Class C Common Units of AssetMark Holdings, which were intended to be treated as profits interests. Immediately following the pricing of the IPO, AssetMark Holdings liquidated and dissolved and distributed shares of the Company’s common stock to its members, including an aggregate number of restricted stock awards (“RSAs”) equal to 6,309,049 shares of the Company’s common stock to the holders of the Class C Common Units of AssetMark Holdings.
These RSAs are subject to the same vesting schedule as the Class C Common Units of AssetMark Holdings, with 50% of the RSAs scheduled to vest in three (3) equal installments on the third, fourth and fifth anniversaries of November 18, 2016 subject to the recipient’s continued employment through the vesting date, and 50% subject to the recipient’s continued employment through February 1, 2021 and the satisfaction of a performance-based vesting condition. The performance condition for these RSAs was deemed to have been satisfied in connection with the IPO. The time-based vesting condition for these RSAs will be satisfied upon the holder’s continued service with the Company through November 2021. In the event that the vesting conditions are not satisfied for any portion of an award, the shares covered by such RSAs will transfer automatically to the Company.
Share-based compensation expense related to the RSAs was $12,252 for the three months ended March 31, 2020.
Stock Options
In connection with the IPO, the Company issued options to certain officers to acquire an aggregate of 918,981 shares of the Company’s common stock outside of the 2019 Equity Incentive Plan, with an exercise price of $22 dollars per share. Each of these options is scheduled to vest and become exercisable in substantially equal installments on each of the first three anniversaries of July 18, 2019.
Share-based compensation expense related to the stock options was $583 for the three months ended March 31, 2020.
Restricted Stock Units
Also in connection with the IPO, the Company issued restricted stock units (“RSUs”) to certain officers and sales employees covering an aggregate of 85,737 shares of the Company’s common stock under the 2019 Equity Incentive Plan. Each of these RSUs is scheduled to vest in substantially equal installments on each of the first three anniversaries of July 18, 2019.
Share-based compensation expense related to the RSUs was $353 for the three months ended March 31, 2020.
13
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 11. Commitments and Contingencies
Litigation
The Company faces the risk of litigation and regulatory investigations and actions in the ordinary course of operating its business, including the risk of class action lawsuits. The Company’s pending legal and regulatory actions include proceedings specific to the Company and others generally applicable to business practices in the industries in which the Company operates. The Company is also subject to litigation arising out of its general business activities such as its contractual and employment relationships. In addition, the Company is subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and other authorities. A substantial legal liability or a significant regulatory action against the Company could have an adverse effect on its business, financial condition and results of operations. Moreover, even if the Company ultimately prevails in the litigation, regulatory action or investigation, the Company could suffer significant reputational harm, which could have an adverse effect on its business, financial condition or results of operations.
Note 12. Income Taxes
The Company’s effective income tax rate differs from the federal corporate tax rate of 21.0%, primarily as a result of state taxes and the income tax effects of the Company’s share-based compensation.
The Company’s effective tax rate was (51.4)% and 55.0% for the three months ended March 31, 2020 and 2019, respectively. This decrease was due to changes in the relative amounts of the Company’s share-based compensation and income before taxes.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The provisions of the CARES Act affecting corporations include, but are not limited to, elimination of certain limitations for utilizing net operating losses, relaxation of limitations on interest deductions, the expensing of costs of acquired qualified improvement property, employee retention tax credits and deferral of payroll taxes. The Company is still evaluating the impact of this new law on its financial condition and results of operations, but no significant impact is anticipated.
Note 13. Related Party Transactions
As of March 31, 2020, the Company had a receivable due from Huatai Securities Co., Ltd.(“HTSC”) of $113, which represents the cash paid by the Company on behalf of HTSC with respect to certain professional services incurred on behalf of HTSC related to IFRS audit fees and goodwill impairment tests fees required by HTSC’s consolidated audit.
14
AssetMark Financial Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 14. Net Income Per Share Attributable to Common Stockholder
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, restricted stock awards and restricted stock units, if dilutive.
The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income per share attributable to common stockholders:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Basic income per share calculation: |
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
2,736 |
|
|
$ |
2,811 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per share attributable to common stockholders, basic |
|
|
67,142,459 |
|
|
|
66,150,000 |
|
Net income per share attributable to common stockholders, basic |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per share attributable to common stockholders, basic |
|
|
67,142,459 |
|
|
|
66,150,000 |
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
Unvested RSAs |
|
|
2,133,649 |
|
|
|
— |
|
Unvested RSUs |
|
|
41,153 |
|
|
|
— |
|
Diluted number of weighted-average shares outstanding |
|
|
69,317,261 |
|
|
|
66,150,000 |
|
Net income per share attributable to common stockholders, diluted |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
The following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Stock Options |
|
|
908,775 |
|
|
|
— |
|
Total |
|
|
908,775 |
|
|
|
— |
|
Note 15. Subsequent Events
None.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated condensed financial statements and the related notes thereto and the other financial information included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year ends on December 31 each year.
Overview
AssetMark is a leading provider of extensive wealth management and technology solutions that power independent financial advisers and their clients. Our platform enables advisers to outsource high-cost and specialty services that would otherwise require significant investments of time and money—helping to level the playing field for independent financial advisers of all sizes. We provide an end-to-end experience, spanning nearly all elements of an adviser’s engagement with his or her client—from initial conversations to ongoing financial planning discussions, including performance reporting and billing. In addition, our platform provides tools and capabilities for advisers to better manage their day-to-day business activities, giving them more time for meaningful conversations with investors.
We believe that independent financial advisers who have a deep understanding of their communities and put the needs of investors first provide the best path for investors to achieve their long-term financial goals. We empower these adviser-entrepreneurs to start, run and grow independent advisory businesses. The compelling value of our tools for advisers and their clients has facilitated our rapid growth.
|
• |
We completed the acquisition of OBS on February 29, 2020. Through the OBS acquisition, we acquired approximately $2.1 billion in platform assets and 499 new financial adviser relationships, of which 67 advisers are engaged advisers. |
Financial Highlights
|
• |
Total revenue for the quarter ended March 31, 2020 was $114.9 million, up $22.6 million, or 24.5%, from $92.3 million for the quarter ended March 31, 2019. |
|
• |
Net income for the quarter ended March 31, 2020 was $2.7 million, or $0.04 per share, compared to net income of $2.8 million, or $0.04 per share, for the quarter ended March 31, 2019. |
|
• |
Adjusted net income for the quarter ended March 31, 2020 was $17.7 million, compared to $12.7 million for the quarter ended March 31, 2019. For a reconciliation of net income, the most directly comparable GAAP financial measure, to adjusted net income, see the section titled “—Key Operating Metrics—Non-GAAP Financial Metrics—Adjusted Net Income.” |
|
• |
Adjusted EBITDA for the quarter ended March 31, 2020 was $28.4 million, up $5.6 million, or 24.8%, from $22.7 million for the quarter ended March 31, 2019. For a reconciliation of net income, the most directly comparable GAAP financial measure, to adjusted EBITDA, see the section titled “—Key Operating Metrics—Non-GAAP Financial Metrics—Adjusted EBITDA.” |
Asset and Adviser Growth Trends
|
• |
Platform assets were $56.0 billion as of March 31, 2020, up 12.7% from $49.7 billion as of March 31, 2019. |
|
• |
We had 2,138 engaged advisers on our platform as of March 31, 2020, up 8.7% from 1,967 as of March 31, 2019. We added 67 engaged advisers through our acquisition of OBS. |
16
Key Factors Affecting Our Performance
Expansion of Our Existing Financial Adviser Base
We are focused on attracting new advisers to our platform with our end-to-end wealth management offering, composed of a fully integrated technology platform, high-touch sales and service support and a curated investment platform. Our extensive offering is built to enhance adviser efficiency so that advisers of all sizes can compete and grow. We also strive to increase our share of wallet, or portion of an adviser’s fee-based business that is invested on our platform, by providing a holistic platform for advisers and surrounding advisers with the tools they need to better serve their clients. Our business will depend in part on our ability to drive higher usage of our platform by financial advisers and their client bases.
Increase of New Financial Advisers on Our Platform
Within the wealth management industry, the percentage of assets served by independent financial advisers is forecasted to grow from 42% in 2018 to 48% in 2023, based on our internal estimates and Cerulli data on expected industry growth. We seek to capitalize on this trend and attract new financial advisers to our platform by continuing to invest in our technology platform, sales and service standards and curated investment offering. Our annual cohort of new producing advisers grew 63% from 548 new producing advisers in 2014 to 894 in 2019. Our business will depend in part on our ability to continue to attract new advisers to our platform.
Technology Development
We invested $203 million in the development of our technology and our dedicated technology team from January 1, 2015 to March 31, 2020. We intend to continue to invest in our technology platform to address the needs of financial advisers and their investors. Our revenue growth will depend, in part, on our ability to continue to launch new offerings and deliver solutions to financial advisers efficiently. While these investments may delay or reduce our profitability, we believe they will enable us to grow our revenue meaningfully in the long term.
Investments in Growth
We have made and expect to continue to make substantial investments across our business, including those related to increasing our total employee base, to support our continued growth. We intend to continue to expand our sales capacity and further improve sales productivity to drive additional revenue and support the growth of our client base. We may incur increased general and administrative expenses to support our growth and operations. Our results of operations will depend in part on our ability to continue to manage such expenses, as well as on the effectiveness of our investments. We expect to continue managing such expenses and investments to support expansion of our adjusted EBITDA margin.
Competition
We compete with a broad range of wealth management firms that offer services to independent investment advisers. Our competitive landscape is defined by three primary factors: 1) technological capabilities, 2) consulting and back office servicing and 3) investment solutions. We may compete on these factors based on products, services or fees. While we anticipate that we will see increased competition and experience fee pressure, we believe that our technology platform, along with our personalized service and curated investment solutions, will continue to drive revenue expansion.
Value of Platform Assets
Our revenue is subject to fluctuations due to changes in general economic conditions, including market conditions and the changing interest rate environment. Most of our revenue is based on the value of assets invested in products on our platform, which is heavily influenced by general economic conditions. Fluctuations in securities prices may affect the value of such assets and may also influence an investor’s decision to select, grow, maintain or reduce an investment. We generate asset-based revenue from fees billed in advance of each quarter, providing visibility into near-term revenue. In addition, we realize spread-based revenue. Spread-based revenue is influenced significantly by interest rate changes and the amount of cash held by investors at our proprietary trust company.
17
Our success in pursuing and executing strategic transactions may impact our assets and revenue. From 2014 to 2019, we acquired the platform assets of three firms, which collectively have added $7.3 billion in assets. In September 2019, we announced our agreement to acquire OBS Financial, which closed on February 29, 2020 and which added approximately $2.1 billion in platform assets. We expect to continue to selectively seek acquisitions that will enhance our scale, operating leverage and capabilities to further deepen our offering to advisers and investors.
COVID-19 Pandemic
Since early 2020, the outbreak of COVID-19 has rapidly evolved into a global pandemic and has adversely impacted global commercial activities. The pandemic has had no significant impact on our unaudited consolidated financial statements for the three months ended March 31, 2020. The near-term impacts related to the COVID-19 pandemic have primarily been to our asset-based revenue and spread-based revenue. The impact of declining global equity and bond markets as well as a lower interest rate environment will first become evident in our financial statements for the second quarter of 2020. We expect to incur expenses related to the transition to an entirely remote workforce arrangement, while at the same time experiencing increased expenditures for asset-based investment trading activities. The impact of COVID-19 is not expected to affect our capabilities to conduct business with our financial advisers. Management expects that the pandemic will adversely affect the Company’s operations and operating results in the second quarter of 2020 and subsequent periods, although, given the uncertainty around the duration and extent of the COVID-19 pandemic, management cannot at this time quantify with any level of specificity the impact on the Company’s results of operations, financial condition or liquidity. We continue to generate positive operating cash flows, have adequate cash on hand, and maintain access to our existing line of credit to meet our short-term liquidity needs. We have experienced neither material impairments of our assets nor a significant change in the fair value of our assets and liabilities due to the COVID-19 pandemic. We are monitoring the developments relating to COVID-19 and are coordinating our operational response based on existing business continuity plans and guidance from global health organizations, relevant governments and general pandemic response best practices.
Initial Public Offering
On July 22, 2019, we completed our IPO, in which we issued and sold 6,250,000 shares of our common stock, and the selling stockholder sold 8,125,000 shares of our common stock (including shares sold in connection with the full exercise of the underwriters’ option to purchase additional shares), at a price to the public of $22.00 per share. We received aggregate net proceeds of $124.1 million from the IPO after deducting underwriting discounts and commissions and offering expenses payable by us. We used the aggregate net proceeds to us, together with cash on hand, to pay down approximately $125 million of our indebtedness under the Term Loan.
Key Operating Metrics
In addition to our GAAP financials, we regularly review the following key metrics to measure performance, identify trends, formulate financial projections, compensate our employees and monitor our business. While we believe that these metrics are useful in evaluating our business, other companies may not use similar metrics or may not calculate similarly titled metrics in a consistent manner.
18
Key metrics for the three months ended March 31, 2020 and 2019 include the following:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
Operational metrics: |
|
|
|
|
|
|
|
|
Platform assets (at period-beginning) (millions of dollars) |
|
$ |
61,608 |
|
|
$ |
44,855 |
|
Net flows (millions of dollars) |
|
|
1,834 |
|
|
|
1,409 |
|
Market impact net of fees (millions of dollars) |
|
|
(9,477 |
) |
|
|
3,431 |
|
Acquisition impact (millions of dollars) |
|
|
2,060 |
|
|
|
— |
|
Platform assets (at period-end) (millions of dollars) |
|
$ |
56,025 |
|
|
$ |
49,695 |
|
Net flows lift (% of beginning-of-year platform assets) |
|
|
3.0 |
% |
|
|
3.1 |
% |
Advisers (at period-end) |
|
|
8,477 |
|
|
|
7,615 |
|
Engaged advisers (at period-end) |
|
|
2,138 |
|
|
|
1,967 |
|
Assets from engaged advisers (at period-end) (millions of dollars) |
|
$ |
48,793 |
|
|
$ |
43,277 |
|
Households (at period-end) |
|
|
176,681 |
|
|
|
137,749 |
|
New producing advisers |
|
|
217 |
|
|
|
198 |
|
Production lift from existing advisers (annualized %) |
|
|
23.3 |
% |
|
|
24.0 |
% |
Assets in custody at ATC (at period-end) (millions of dollars) |
|
$ |
38,770 |
|
|
$ |
35,558 |
|
ATC client cash (at period-end) (millions of dollars) |
|
$ |
2,991 |
|
|
$ |
1,411 |
|
Financial metrics: |
|
|
|
|
|
|
|
|
Total revenue (millions of dollars) |
|
$ |
115 |
|
|
$ |
92 |
|
Net income (millions of dollars) |
|
$ |
2.7 |
|
|
$ |
2.8 |
|
Net income margin (%) |
|
|
2.4 |
% |
|
|
3.0 |
% |
Capital expenditure (millions of dollars) |
|
$ |
6.5 |
|
|
$ |
4.7 |
|
Non-GAAP financial metrics: |
|
|
|
|
|
|
|
|
Adjusted EBITDA (millions of dollars) |
|
$ |
28.4 |
|
|
$ |
22.7 |
|
Adjusted EBITDA margin (%) |
|
|
24.7 |
% |
|
|
24.6 |
% |
Adjusted net income (millions of dollars) |
|
$ |
17.7 |
|
|
$ |
12.7 |
|
Platform Assets
We believe that the amount of assets on our platform is an important indicator of the strength and growth of our business, our increased customer footprint and the market acceptance of our platform. We define platform assets as all assets on the AssetMark platform, whether these are assets for which we provide advisory services, referred to as regulatory assets under management (“AUM”), or non-advisory assets under administration, assets held in cash accounts or otherwise not managed (collectively, “Other Assets”). There is generally no material economic difference to our financial results whether assets are considered AUM or Other Assets. We view our platform assets as reflective of our revenue growth and potential for future growth. We had platform assets of $56,025 million and $49,695 million as of March 31, 2020 and 2019, respectively. Our regulatory AUM totaled $33,748 million and $32,719 million as of March 31, 2020 and 2019, respectively. We intend to continue growing our platform assets with enhancements to our technology, services and investment solutions. We expect the growth in our platform assets will remain a significant indicator of our business momentum and results of operations as existing advisers and new advisers realize the benefits of our platform. Our platform assets in any period may continue to fluctuate as a result of several factors, including our adviser satisfaction with the functionality, features, performance or pricing of our offering, overall fluctuations in the securities markets and other factors, a number of which are beyond our control.
Net Flows, Market Impact Net of Fees and Acquisition Impact
The changes in our platform assets from period to period are primarily driven by the amount of new assets that are added to existing and new client accounts, which we refer to as production, and the amount of assets that are withdrawn from client accounts, which we refer to as redemption. We refer to the difference between production and redemption as net flows. Positive net flows indicate that the amount of assets added to client accounts exceeds the amount of assets that have been terminated or withdrawn from client accounts. In addition to net flows, the change in the market value of investments held in client accounts between the beginning and end of a period, which we define as market impact, also influences platform assets. For each period, we show the market impact on platform assets net of the fees paid to financial advisers, AssetMark custodians and certain fees embedded in investment vehicles. Further, acquisition impact refers to the amount of assets added to our platform through acquisitions.
19
Net flows lift refers to net flows over a given period divided by platform assets at the beginning of the year. Net flows lift allows us to determine the percentage return we are attaining in terms of net new assets from our asset base at the beginning of year. We use beginning-of-year platform assets to calculate net flows lift for a given quarter to eliminate market and net flows impacts from previous quarters of the calendar year, which allows for a more accurate and consistent quarterly comparison.
Advisers (at Period-End)
Adviser count reflects the total number of advisers who had at least one investor account on our platform at the end of the given period.
Engaged Advisers (at Period-End)
Engaged advisers are advisers with at least $5 million in platform assets.
Assets from Engaged Advisers (at Period-End)
Assets from engaged advisers are total platform assets attributable to engaged advisers.
Households (at Period-End)
We define a “Household” as one or more client accounts that are grouped together based on a relationship identification code as determined by the financial adviser.
New Producing Advisers
New producing advisers (“NPAs”) for a given period represents the number of advisers that invested their first client assets on our platform in that period.
Production Lift from Existing Advisers (Annualized)
Existing advisers for a given period are defined as those who had invested client assets on our platform as of the beginning of the period. Production lift from existing advisers for a given period is calculated by dividing production (the amount of new assets that are added to client accounts) attributable to existing advisers (excluding GFPC advisers) for such period by platform assets as of the beginning of such period and annualizing the result. This metric represents both the organic growth of these advisers as well as any incremental share of wallet of the adviser’s business that is added to our platform on an annualized basis. We previously disclosed production lift from existing advisers as a year-to-date metric, despite calculating the metric on an annualized basis. As such, we have revised the description of this metric to match our calculations.
Assets in Custody at ATC (at Period-End)
Assets in custody at ATC represents platform assets that are in custody at AssetMark Trust Company (“ATC”).
ATC Client Cash (at Period-End)
In general, all accounts with ATC are required to have cash at a minimum level ranging from of 1.5% to 5% of invested assets. In addition to this minimum amount, strategists and advisers have the discretion to hold additional invested assets in cash. We refer to the aggregate amount of cash held at ATC as ATC client cash. As of March 31, 2020 and 2019, ATC client cash accounted for 8% and 4%, respectively, of the total assets in custody at ATC. As of March 31, 2020 and 2019, 100% and 87%, respectively, of the ATC client cash was placed with the ATC-insured cash deposit program and was the primary source of spread-based revenue for our business.
Total Revenue
Total revenue includes all revenue that we recognize, including asset-based revenue, spread-based revenue and other revenue. We recently announced plans to transition certain third-party mutual fund strategies from retail to institutional share classes, which have lower operating expense ratios than our retail share class mutual fund offerings. This transition, which we expect to take effect in
20
June 2020, will result in a lower overall cost of investment for clients, and coupled with changes in pricing for these products, we expect that it will negatively impact our total revenue.
Net Income
Net income is defined as total revenue less total expenses and provision for income taxes.
Net Income Margin
Net income margin is defined as net income divided by total revenue.
Capital Expenditure
Capital expenditure represents the long-term investments that we make on an annual basis. Capital expenditure primarily reflects investments in technology, the development of new products and services and other intangible assets, but also includes investments in property and equipment such as technology support and office space.
Non-GAAP Financial Metrics
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income tax expense, depreciation and amortization and less interest income), further adjusted to exclude certain non-cash charges and other adjustments set forth below. Adjusted EBITDA margin is defined as adjusted EBITDA divided by total revenue. Adjusted EBITDA and adjusted EBITDA margin are useful financial metrics in assessing our operating performance from period to period because they exclude certain items that we believe are not representative of our core business, such as certain material non-cash items and other adjustments such as share-based compensation, strategic initiatives and reorganization and integration costs. We believe that adjusted EBITDA and adjusted EBITDA margin, viewed in addition to, and not in lieu of, our reported GAAP results, provide useful information to investors regarding our performance and overall results of operations for various reasons, including:
|
• |
non-cash equity grants made to employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; as such, share-based compensation expense is not a key measure of our operating performance; and |
|
• |
costs associated with acquisitions and the resulting integrations, debt refinancing, restructuring, litigation and conversions can vary from period to period and transaction to transaction; as such, expenses associated with these activities are not considered a key measure of our operating performance. |
We use adjusted EBITDA and adjusted EBITDA margin:
|
• |
as measures of operating performance; |
|
• |
for planning purposes, including the preparation of budgets and forecasts; |
|
• |
to allocate resources to enhance the financial performance of our business; |
|
• |
to evaluate the effectiveness of our business strategies; |
|
• |
in communications with our board of directors concerning our financial performance; and |
|
• |
as considerations in determining compensation for certain employees. |
Adjusted EBITDA and adjusted EBITDA margin have limitations as analytical tools, and should not be considered in isolation to, or as substitutes for, analysis of our results as reported under GAAP. Some of these limitations are:
|
• |
adjusted EBITDA and adjusted EBITDA margin do not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments; |
|
• |
adjusted EBITDA and adjusted EBITDA margin do not reflect changes in, or cash requirements for, working capital needs; |
21
|
• |
adjusted EBITDA and adjusted EBITDA margin do not reflect interest expense on our debt or the cash requirements necessary to service interest or principal payments; and |
|
• |
the definitions of adjusted EBITDA and adjusted EBITDA margin can differ significantly from company to company and as a result have limitations when comparing similarly titled measures across companies. |
Set forth below is a reconciliation from net income and net income margin, the most directly comparable GAAP financial measures, to adjusted EBITDA and adjusted EBITDA margin for the three months ended March 31, 2020 and 2019.
|
|
Three Months Ended March 31, |
|
|
Three Months Ended March 31, |
|
||||||||||
(in thousands except for percentages) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
Net income |
|
$ |
2,736 |
|
|
$ |
2,811 |
|
|
|
2.4 |
% |
|
|
3.0 |
% |
Provision for (benefit from) income taxes |
|
|
(929 |
) |
|
|
3,440 |
|
|
|
(0.8 |
)% |
|
|
3.7 |
% |
Interest income |
|
|
(482 |
) |
|
|
(892 |
) |
|
|
(0.4 |
)% |
|
|
(1.0 |
)% |
Interest expense |
|
|
1,627 |
|
|
|
4,024 |
|
|
|
1.4 |
% |
|
|
4.4 |
% |
Amortization/depreciation |
|
|
8,409 |
|
|
|
6,896 |
|
|
|
7.3 |
% |
|
|
7.5 |
% |
EBITDA |
|
|
11,361 |
|
|
|
16,279 |
|
|
|
9.9 |
% |
|
|
17.6 |
% |
Share-based compensation(1) |
|
|
13,188 |
|
|
|
5,226 |
|
|
|
11.5 |
% |
|
|
5.7 |
% |
IPO readiness(2) |
|
|
— |
|
|
|
568 |
|
|
|
— |
|
|
|
0.6 |
% |
Reorganization and integration costs(3) |
|
|
103 |
|
|
|
657 |
|
|
|
0.1 |
% |
|
|
0.7 |
% |
Acquisition expenses(4) |
|
|
3,577 |
|
|
|
— |
|
|
|
3.1 |
% |
|
|
— |
|
Business continuity plan(5) |
|
|
96 |
|
|
|
— |
|
|
|
0.1 |
% |
|
|
— |
|
Unrealized loss in investments |
|
|
50 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
28,375 |
|
|
$ |
22,730 |
|
|
|
24.7 |
% |
|
|
24.6 |
% |
(1) |
“Share-based compensation” represents granted share-based compensation in the form of Class C Common Units (which are incentive units) of AssetMark Holdings LLC, our former parent company, and RSA, restricted stock unit and stock option grants by us to certain of our directors and employees. Although this expense occurred in each measurement period, we have added the expense back in our calculation of adjusted EBITDA because of its noncash impact. |
(2) |
“IPO readiness” includes professional fees related to our preparation for becoming a public company. These expenses primarily include services for financial and human resources systems implementation, executive compensation assessments and other consulting services. These expenses are nonrecurring as they are limited to our public-company readiness preparation and do not include ongoing public-company compliance costs. |
(3) |
“Reorganization and integration costs” includes costs related to our functional reorganization within our Operations, Technology and Retirement functions as well as duplicate costs related to the outsourcing of back-office operations functions. While we have incurred such expenses in all periods measured, these expenses serve varied reorganization and integration initiatives, each of which is non-recurring. We do not consider these expenses to be part of our core operations. |
(4) |
“Acquisition expenses” includes employee severance, transition and retention expenses, duplicative general and administrative expenses and other professional fees related to acquisitions. |
(5) |
“Business continuity plan” includes incremental compensation and other costs that are directly related to operations while transitioning to a remote workforce due to the COVID-19 pandemic. |
22
Set forth below is a summary of the adjustments involved in the reconciliation from net income and net income margin, the most directly comparable GAAP financial measures, to adjusted EBITDA and adjusted EBITDA margin for the three months ended March 31, 2020 and 2019, broken out by compensation and non-compensation expenses.
|
|
Three Months Ended March 31, 2020 |
|
|
Three Months Ended March 31, 2019 |
|
||||||||||||||||||
(in thousands) |
|
Compensation |
|
|
Non- Compensation |
|
|
Total |
|
|
Compensation |
|
|
Non- Compensation |
|
|
Total |
|
||||||
Share-based compensation(1) |
|
$ |
13,188 |
|
|
$ |
— |
|
|
$ |
13,188 |
|
|
$ |
5,226 |
|
|
$ |
— |
|
|
$ |
5,226 |
|
IPO readiness(2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
568 |
|
|
|
568 |
|
Reorganization and integration costs(3) |
|
|
105 |
|
|
|
(2 |
) |
|
|
103 |
|
|
|
562 |
|
|
|
95 |
|
|
|
657 |
|
Acquisition expenses(4) |
|
|
1,132 |
|
|
|
2,445 |
|
|
|
3,577 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Business continuity plan(5) |
|
|
96 |
|
|
|
— |
|
|
|
96 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Unrealized loss in investments |
|
|
— |
|
|
|
50 |
|
|
|
50 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total adjustments to adjusted EBITDA |
|
$ |
14,521 |
|
|
$ |
2,493 |
|
|
$ |
17,014 |
|
|
$ |
5,788 |
|
|
$ |
663 |
|
|
$ |
6,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020 |
|
|
Three Months Ended March 31, 2019 |
|
||||||||||||||||||
(in percentages) |
|
Compensation |
|
|
Non- Compensation |
|
|
Total |
|
|
Compensation |
|
|
Non- Compensation |
|
|
Total |
|
||||||
Share-based compensation(1) |
|
|
11.5 |
% |
|
|
— |
|
|
|
11.5 |
% |
|
|
5.7 |
% |
|
|
— |
|
|
|
5.7 |
% |
IPO readiness(2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.6 |
% |
|
|
0.6 |
% |
Reorganization and integration costs(3) |
|
|
0.1 |
% |
|
|
— |
|
|
|
0.1 |
% |
|
|
0.6 |
% |
|
|
0.1 |
% |
|
|
0.7 |
% |
Acquisition expenses(4) |
|
|
1.0 |
% |
|
|
2.1 |
% |
|
|
3.1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Business continuity plan(5) |
|
|
0.1 |
% |
|
|
— |
|
|
|
0.1 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Unrealized loss in investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total adjustments to adjusted EBITDA margin % |
|
|
12.7 |
% |
|
|
2.1 |
% |
|
|
14.8 |
% |
|
|
6.3 |
% |
|
|
0.7 |
% |
|
|
7.0 |
% |
(1) |
“Share-based compensation” represents granted share-based compensation in the form of Class C Common Units (which are incentive units) of AssetMark Holdings LLC, our former parent company, and RSA, restricted stock unit and stock option grants by us to certain of our directors and employees. Although this expense occurred in each measurement period, we have added the expense back in our calculation of adjusted EBITDA because of its noncash impact. |
(2) |
“IPO readiness” includes professional fees related to our preparation for becoming a public company. These expenses primarily include services for financial and human resources systems implementation, executive compensation assessments and other consulting services. These expenses are nonrecurring as they are limited to our public-company readiness preparation and do not include ongoing public-company compliance costs. |
(3) |
“Reorganization and integration costs” includes costs related to our functional reorganization within our Operations, Technology and Retirement functions as well as duplicate costs related to the outsourcing of back-office operations functions. While we have incurred such expenses in all periods measured, these expenses serve varied reorganization and integration initiatives, each of which is non-recurring. We do not consider these expenses to be part of our core operations. |
(4) |
“Acquisition expenses” includes employee severance, transition and retention expenses, duplicative general and administrative expenses and other professional fees related to acquisitions. |
(5) |
“Business continuity plan” includes incremental compensation and other costs that are directly related to operations while transitioning to a remote workforce due to the COVID-19 pandemic. |
Adjusted Net Income
Adjusted net income represents net income before: (a) share-based compensation expense, (b) amortization of acquisition-related intangible assets, (c) acquisition and related integration expenses, (d) restructuring and conversion costs and (e) certain other expenses. Reconciled items are tax effected using the income tax rates in effect for the applicable period, adjusted for any potentially non-deductible amounts. We prepared adjusted net income to eliminate the effects of items that we do not consider indicative of our core operating performance. We have historically not used adjusted net income for internal management reporting and evaluation purposes; however, we believe that adjusted net income, viewed in addition to, and not in lieu of, our reported GAAP results, provides useful information to investors regarding our performance and overall results of operations for various reasons, including the following:
|
• |
non-cash equity grants made to employees at a certain price and point in time do not necessarily reflect how our business is performing at any particular time; as such, share-based compensation expense is not a key measure of our operating performance; |
|
• |
costs associated with acquisitions and related integrations, debt refinancing, restructuring and conversions can vary from period to period and transaction to transaction; as such, expenses associated with these activities are not considered a key measure of our operating performance; and |
23
|
the method by which assets were acquired; as such, the amortization of intangible assets obtained in acquisitions is not considered a key measure of our operating performance. |
Adjusted net income does not purport to be an alternative to net income or cash flows from operating activities. The term adjusted net income is not defined under GAAP, and adjusted net income is not a measure of net income, operating income or any other performance or liquidity measure derived in accordance with GAAP. Therefore, adjusted net income has limitations as an analytical tool and should not be considered in isolation to, or as a substitute for, analysis of our results as reported under GAAP. Some of these limitations are:
|
• |
adjusted net income does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments; |
|
• |
adjusted net income does not reflect changes in, or cash requirements for, working capital needs; and |
|
• |
other companies in the financial services industry may calculate adjusted net income differently than we do, limiting its usefulness as a comparative measure. |
Set forth below is a reconciliation from net income, the most directly comparable GAAP financial measure, to adjusted net income for the three months ended March 31, 2020 and 2019.
|
|
Three Months Ended March 31, 2020 |
|
|
Three Months Ended March 31, 2019 |
|
||||||||||||||||||
(in thousands) |
|
Compensation |
|
|
Non- Compensation |
|
|
Total |
|
|
Compensation |
|
|
Non- Compensation |
|
|
Total |
|
||||||
Net income |
|
|
|
|
|
|
|
|
|
$ |
2,736 |
|
|
|
|
|
|
|
|
|
|
$ |
2,811 |
|
Acquisition-related amortization(1) |
|
$ |
— |
|
|
$ |
5,108 |
|
|
|
5,108 |
|
|
$ |
— |
|
|
$ |
5,108 |
|
|
|
5,108 |
|
Expense adjustments(2) |
|
|
1,332 |
|
|
|
2,443 |
|
|
|
3,775 |
|
|
|
562 |
|
|
|
663 |
|
|
|
1,225 |
|
Share-based compensation |
|
|
13,188 |
|
|
|
— |
|
|
|
13,188 |
|
|
|
5,226 |
|
|
|
— |
|
|
|
5,226 |
|
Unrealized loss in investments |
|
|
— |
|
|
|
50 |
|
|
|
50 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Tax effect of adjustments(3) |
|
|
(346 |
) |
|
|
(6,804 |
) |
|
|
(7,150 |
) |
|
|
(146 |
) |
|
|
(1,501 |
) |
|
|
(1,647 |
) |
Adjusted net income |
|
$ |
14,174 |
|
|
$ |
797 |
|
|
$ |
17,707 |
|
|
$ |
5,642 |
|
|
$ |
4,270 |
|
|
$ |
12,723 |
|
(1) |
Relates to intangible assets established in connection with HTSC’s acquisition of our Company in 2016. |
(2) |
Consists of the adjustments to EBITDA listed in the adjusted EBITDA reconciliation table above other than share-based compensation. |
(3) |
Reflects the tax impact of expense adjustments and acquisition-related amortization. |
Components of Results of Operations
Revenue
Asset-Based Revenue
A majority of our revenue is derived from the fees we charge as a percentage of platform assets. We record this revenue as asset-based revenue. Our asset-based revenue varies based on the types of investment solutions and services that financial advisers utilize for their clients. Asset-based revenue accounted for approximately 92.0% and 90.0% of our total revenue for the three months ended March 31, 2020 and 2019. We expect asset-based revenue to decrease in the second quarter of 2020 due to lower assets under management as a result of market downturn in the first quarter of 2020 due to the COVID-19 pandemic.
Spread-Based Revenue
Our spread-based revenue consists of the fees we earn on cash custodied at ATC, one of our wholly owned subsidiaries and one of several custodians offered on our platform. ATC utilizes third-party banks to place and hold client cash and is paid interest-rate-sensitive fees calculated by reference to such deposits. We expect spread-based revenue to decrease from the first quarter of 2020 as a result of the recent significant decline in interest rates in the U.S.
Other Revenue
Other revenue consists primarily of interest earned on operating cash held by us. Other one-time income items are reported under “Other Revenue,” as discussed elsewhere in this section. We expect other revenue to decrease in future periods as a result of the recent significant decline in interest rates in the U.S.
24
Asset-Based Expenses
Asset-based expenses primarily relate to costs incurred directly from the generation of asset-based revenue, including strategist, investment manager and sub-advisory fees, custody fees paid to our third-party custodian partners, payments to our broker-dealer partners and business development allowance payments for our premier advisers. These expenses are typically calculated based upon a percentage of the market value of assets held in customer accounts measured as of the end of each fiscal quarter. We expect asset-based expenses to decrease in the second quarter of 2020 due to lower assets under management as a result of market downturn in the first quarter of 2020 due to the COVID-19 pandemic.
Spread-Based Expenses
Our spread-based expenses consist of expenses paid to ATC’s third-party administrator for administering ATC’s insured cash deposit program and interest payments to clients.
Employee Compensation
Employment and compensation expenses include salaries, commissions, non-cash share-based compensation, profit sharing, benefits and employer-related taxes. We expect that the majority of any increase in employee compensation expenses in the next 12 months will arise in connection with additional non-cash share-based compensation.
General and Operating Expenses
General and operating expenses include occupancy expenses and expenses relating to trading, events, communications services, research and data services, website and systems development, marketing, legal services and travel and entertainment. We expect general and operating expenses to increase in absolute dollars in future periods as a result of increased costs associated with being a publicly traded company, including significant increased legal and accounting costs related to compliance with rules and regulations implemented by the SEC and the New York Stock Exchange (the “NYSE”), as well as additional insurance, investor relations and other costs associated with being a public company.
Professional Fees
Professional fee expenses primarily relate to the fees we pay to the third-party administrator of AssetMark Retirement Services, Inc., our wholly owned subsidiary that operates our retirement business, as well as fees associated with the outsourcing of administrative operations functions, audit and legal costs and expenses related to being a publicly traded company.
Depreciation and Amortization
Amortization expense reflects the amortization of our intangible technology assets and our other assets such as trade names, broker-dealer licenses and ATC regulatory status, from the fair value established at the date of our sale to Huatai Securities Co., Ltd. (“HTSC”) in 2016. Depreciation expense reflects the ongoing cost of annual usage of property and equipment.
Other Income
Other income consists of unrealized net gains from investment securities.
Interest Expense
Interest expense reflects the interest we pay on our Term Loan, which may fluctuate over time.
Other Expense
Other expense represents capitalized debt issuance costs extinguished due to our repayment of $125 million of our outstanding indebtedness under our Term Loan.
25
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
The following discussion presents an analysis of our results of operations for the three months ended March 31, 2020 and 2019. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where possible and practical, have quantified the impact of such items.
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
|
|
|||||
(in thousands) |
|
2020 |
|
|
2019 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based revenue |
|
$ |
105,650 |
|
|
$ |
83,063 |
|
|
$ |
22,587 |
|
|
|
27.2 |
|
Spread-based revenue |
|
|
7,951 |
|
|
|
7,549 |
|
|
|
402 |
|
|
|
5.3 |
|
Other revenue |
|
|
1,289 |
|
|
|
1,702 |
|
|
|
(413 |
) |
|
|
(24.3 |
) |
Total revenue |
|
|
114,890 |
|
|
|
92,314 |
|
|
|
22,576 |
|
|
|
24.5 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based expenses |
|
|
35,015 |
|
|
|
28,102 |
|
|
|
6,913 |
|
|
|
24.6 |
|
Spread-based expenses |
|
|
1,289 |
|
|
|
478 |
|
|
|
811 |
|
|
|
169.7 |
|
Employee compensation |
|
|
43,497 |
|
|
|
31,885 |
|
|
|
11,612 |
|
|
|
36.4 |
|
General and operating expenses |
|
|
19,365 |
|
|
|
12,292 |
|
|
|
7,073 |
|
|
|
57.5 |
|
Professional fees |
|
|
3,831 |
|
|
|
2,386 |
|
|
|
1,445 |
|
|
|
60.6 |
|
Depreciation and amortization |
|
|
8,409 |
|
|
|
6,896 |
|
|
|
1,513 |
|
|
|
21.9 |
|
Total operating expenses |
|
|
111,406 |
|
|
|
82,039 |
|
|
|
29,367 |
|
|
|
35.8 |
|
Interest expense |
|
|
1,627 |
|
|
|
4,024 |
|
|
|
(2,397 |
) |
|
|
(59.6 |
) |
Other expense |
|
|
50 |
|
|
|
— |
|
|
|
50 |
|
|
* |
|
|
Income before income taxes |
|
|
1,807 |
|
|
|
6,251 |
|
|
|
(4,444 |
) |
|
|
(71.1 |
) |
Provision for (benefit from) income taxes |
|
|
(929 |
) |
|
|
3,440 |
|
|
|
(4,369 |
) |
|
|
(127.0 |
) |
Net income |
|
|
2,736 |
|
|
|
2,811 |
|
|
|
(75 |
) |
|
|
(2.7 |
) |
Unrealized gain on available for sale investments, net of tax |
|
|
— |
|
|
|
16 |
|
|
|
(16 |
) |
|
* |
|
|
Net comprehensive income |
|
$ |
2,736 |
|
|
$ |
2,827 |
|
|
$ |
(91 |
) |
|
|
(3.2 |
) |
|
* |
Not meaningful. |
Asset-Based Revenue
Asset-based revenue increased by $22.6 million, or 27.2%, from $83.1 million in the three months ended March 31, 2019 to $105.7 million in the three months ended March 31, 2020. This increase was primarily related to increased platform fees and advisory fees of $22.4 million associated with growth in platform assets, primarily driven by positive net flows and strong market conditions. The remaining increase was primarily related to higher custodial revenue driven by increased administrative service fees due to growth in mutual fund assets on our platform.
Spread-Based Revenue
Spread-based revenue increased $0.4 million, or 5.3%, from $7.6 million in the three months ended March 31, 2019 to $8.0 million in the three months ended March 31, 2020. This increase was primarily due to higher cash balances held at ATC, offset by lower interest rates on cash invested through ATC’s insured cash deposit program.
Other revenue decreased by $0.4 million, or 24.3%, from $1.7 million in the three months ended March 31, 2019 to $1.3 million in the three months ended March 31, 2020. This decrease was primarily related to lower interest income from lower interest rates and lower cash balances generated from operating activities due to market downturns caused by the recent COVID-19 pandemic.
26
Asset-based expenses increased by $6.9 million, or 24.6%, from $28.1 million in the three months ended March 31, 2019 to $35.0 million in the three months ended March 31, 2020. This increase was primarily related to increased strategist, investment management and sub-adviser expenses of $5.2 million, due to growth in platform assets. We also experienced an increase in asset-based broker-dealer payments of $1.0 million driven by growth in platform assets. The remaining increase was due to higher marketing allowances and custody fees.
Spread-Based Expenses
Spread-based expenses increased by $0.8 million, or 169.7%, from $0.5 million in the three months ended March 31, 2019 to $1.3 million in the three months ended March 31, 2020. This increase was due to higher interest-credited payments to clients driven by higher cash balances at ATC and the introduction of ATC’s high yield cash product in 2019.
Employee Compensation
Employee compensation increased by $11.6 million, or 36.4%, from $31.9 million in the three months ended March 31, 2019 to $43.5 million in the three months ended March 31, 2020. This increase was primarily due to an $8.0 million increase in share-based compensation as a result of the growth in the valuation of our business and our issuance of RSAs immediately following the pricing of our IPO. The increase in employee compensation was also due to a $2.6 million increase in salaries and related expenses due to our increased associate headcount to support our ongoing growth, including $1.1 million in expenses related to the GFPC and OBS acquisitions that will continue until we transition GFPC and OBS assets to our platform, partially offset by a decrease in reorganization and integration costs of $0.5 million.
General and Operating Expenses
General and operating expenses increased by $7.1 million, or 57.5%, from $12.3 million in the three months ended March 31, 2019 to $19.4 million in the three months ended March 31, 2020. This increase was primarily due to $2.2 million in GFPC- and OBS-related costs that will continue until we transition GFPC and OBS assets to our platform, partially offset by a decrease in reorganization and integration costs of $0.1 million. The increase was also driven by $1.6 million in higher events spend, $0.7 million in higher insurance costs, $0.6 million in higher building costs, $0.5 million in higher software and hardware spend and higher spend related to subscriptions, printing and postage, legal expenses, trading fees and travel.
Professional Fees
Professional fees increased by $1.4 million, or 60.6%, from $2.4 million in the three months ended March 31, 2019 to $3.8 million in the three months ended March 31, 2020. This increase was due to $0.9 million in higher consulting fees, $0.5 million in business process optimization expense, $0.4 million in higher audit fees and $0.2 million in acquisition costs, partially offset by $0.6 million in lower reorganization and integration costs.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $1.5 million, or 21.9%, from $6.9 million in the three months ended March 31, 2019 to $8.4 million in the three months ended March 31, 2020. This increase was due in part to $0.4 million of amortization expense related to intangible assets established in connection with the GFPC and OBS acquisitions. The remaining increase was related to incremental assets placed in service during 2018 and 2019. When HTSC acquired us on October 31, 2016, all intangible assets were adjusted to fair value, and those assets with definite lives commenced amortization schedules ranging from 3- to 20-years. Because fewer than four years had elapsed since the acquisition in late 2016, we experienced minimal fully amortized asset run-off in 2018 and 2019 with which to offset the incremental assets recently placed in service.
Interest Expense
Interest expense decreased by $2.4 million, or 59.6%, from $4.0 million in the three months ended March 31, 2019 to $1.6 million in the three months ended March 31, 2020. This decrease was due to our partial repayment of $125 million of our outstanding indebtedness under our Term Loan.
27
Other expense increased by $50,000 from $0 in the three months ended March 31, 2019 to $50,000 in the three months ended March 21, 2020. This increase was primarily due to an unrealized loss in investments held as a result of recent market declines due to the COVID-19 pandemic.
Provision for (Benefit from) Income Taxes
Provision for income taxes decreased by $4.4 million, or 127.0%, from an income tax expense of $3.4 million in the three months ended March 31, 2019 to a benefit from income taxes of $0.9 million in the three months ended March 31, 2020. This decrease was due to changes in the relative amounts of our share-based compensation and income before taxes.
Net comprehensive income decreased by $0.1 million, or 3.2%, from $2.8 million in the three months ended March 31, 2019 to a $2.7 million in the three months ended March 31, 2020, despite a $22.6 million increase in total revenue over the same period. This decrease in net comprehensive income was due to increased expenses incurred in the quarter ended March 31, 2020, including (i) a $11.6 million in compensation with approximately $8.0 million related to increases in the carrying value of share-based compensation expenses attributed to the growth in the valuation of our business, (ii) a $7.7 million increase in asset-based expenses and spread-based expenses related to the growth in revenue, and (iii) a $7.1 million increase in general and operating expenses due to various increase due to growth in the business, including $2.2 million in acquisition costs, $1.6 million in higher events spending, and $0.7 million in higher insurance costs, partially offset by a $4.4 million decrease in the provision for income taxes related to expecting an income tax benefit in 2020.
Liquidity and Capital Resources
Liquidity
Since 2016, our operations have been financed primarily through cash flows from operations. In November of 2018, we also established a credit facility consisting of a $250.0 million term loan and a $20.0 million revolving credit facility with Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”). As of March 31, 2020 and 2019, we had cash and cash equivalents of $80.2 million and $96.3 million, respectively, and restricted cash of $8.5 million and $9.0 million, respectively. Over the next twelve months, we expect that our cash and liquidity needs will continue to be met by cash generated by our ongoing operations as well as our credit facility. To the extent that existing cash, cash from operations and our credit facility are not sufficient to fund our future operations, we may need to raise additional funds through public or private equity or additional debt financing. In addition, we may opportunistically seek to raise additional capital to fund our continued growth. To the extent that we are unsuccessful in additional debt or equity financings, our plans for continued growth may be curtailed.
Credit Facility
In November 2018, we entered into a credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent (collectively, the “Agent”), and the lenders party thereto (the “Credit Agreement”), which we amended on June 28, 2019. The Credit Agreement consists of a $250.0 million term loan (the “Term Loan”) and a $20.0 million revolving credit facility (the “Revolver,” and together with the Term Loan, collectively, the “Credit Facility”). Our obligations under the Credit Facility are guaranteed by certain of our subsidiaries and are secured by substantially all of our assets, and all of the assets of certain of our subsidiaries, subject to certain exceptions. We used the net proceeds to us from the IPO, together with cash on hand, to repay approximately $125 million of our indebtedness under the Term Loan on July 26, 2019. As of March 31, 2020, $123.7 million aggregate principal amount of the Term Loan remained outstanding and the Revolver was undrawn.
28
The Term Loan matures in November 2025 and requires quarterly amortization payments equal to $625,000, subject to a prepayment adjustment. The Revolver matures in November 2023 with outstanding loans thereunder payable within 364 days of the applicable drawdown date. Both the Term Loan and the Revolver bear interest at (x) the London InterBank Offered Rate (“LIBOR”) plus a margin of 3.50%, with a step down to 3.25% or (y) the Alternate Base Rate, as defined and specified in the Credit Agreement, plus a margin of 2.50%, with a step down to 2.25%, in each case based on our achievement of a specified first-lien leverage ratio. Additionally, the Term Loan’s margin was reduced by 0.25% following our IPO. With respect to the Revolver, a quarterly fee of 0.50% is due for the unused amounts thereunder with a stepdown to 0.375% based on our achievement of a specified first-lien leverage ratio. The Credit Agreement includes a process by which a successor rate to LIBOR will be determined in the event that LIBOR is no longer available in the market, whereby we and the Agent will endeavor to establish an alternative rate of interest giving consideration to the then-prevailing market conditions for syndicated loans in the United States.
The Credit Agreement contains customary affirmative and negative covenants, including reporting requirements and restrictions, subject to various exceptions, on the incurrence of additional indebtedness, the creation of liens, the making of acquisitions and investments, the disposal of assets and the making of restricted payments. Additionally, the Revolver includes a springing financial covenant, which provides that if, on the last day of a fiscal quarter, the principal amount of our revolving loans and letters of credit, subject to certain exceptions, exceeds $6.0 million, our total leverage ratio shall not exceed 4.75 to 1.00 for the fiscal quarters between March 31, 2019 and December 31, 2019 or 4.50 to 1.00 for the fiscal quarters ending on or after March 31, 2020. As of March 31, 2020, we were in compliance with all applicable covenants. The Credit Agreement also contains customary events of default, which could result in acceleration of amounts due under the Credit Facility. Such events of default include, subject to the grace periods specified therein, our failure to pay principal or interest when due, our failure to satisfy or comply with covenants, a change of control, the imposition of certain judgments and the invalidation of liens we have granted.
Cash Flows
The following table presents information regarding our cash flows, cash, cash equivalents and restricted cash for the periods indicated:
|
|
Three months ended March 31, |
|
|||||
(in thousands) |
|
2020 |
|
|
2019 |
|
||
Cash flow from operating activities |
|
$ |
9,249 |
|
|
$ |
2,769 |
|
Cash flow used in investing activities |
|
|
(25,929 |
) |
|
|
(5,020 |
) |
Cash flow from (used in) financing activities |
|
|
— |
|
|
|
(625 |
) |
Net change in cash, cash equivalents and restricted cash |
|
|
(16,680 |
) |
|
|
(2,876 |
) |
Cash, cash equivalents and restricted cash at beginning of period |
|
|
105,341 |
|
|
|
112,354 |
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
88,661 |
|
|
$ |
109,478 |
|
Cash Flows from Operating Activities
Cash flows from operating activities increased by $6.5 million in the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to an increase in share-based compensation expense of $8.0 million, an increase in depreciation and amortization of $1.5 million, an increase in fees and other receivables of $1.9 million and an increase in other current assets of $1.8 million, partially offset by a $2.2 million decrease in payables and a decrease of $5.0 million in income tax receivables.
Cash Used in Investing Activities
Cash used in investing activities increased by $20.9 million in the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to the $18.4 million purchase price for the OBS acquisition, $1.8 million increase in capital expenditures and a $0.7 million in purchases of investments.
Cash Flows from (Used in) Financing Activities
Cash flows from financing activities decreased by $0.6 million in the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This decrease was primarily due to net cash outflows in 2019 of $0.6 million, which were related to our repayment of $125 million under our Term Loan.
29
There have been no material changes to our contractual obligations and commitments as of March 31, 2020 from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
As of December 31, 2019 and March 31, 2020, we had no off-balance sheet arrangements.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Tax Cuts and JOBS Act. Under the Jobs Act of 2017 (the “JOBS Act”), emerging growth companies can delay adopting new or revised accounting standards issued after the enactment of the JOBS Act until those standards apply to private companies. We have elected to use this extended transition period under the JOBS Act.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of consolidated financial statements in accordance with GAAP requires certain estimates, assumptions and judgments to be made that may affect our consolidated financial statements. Accounting policies that have significant impact on our results are described in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The accounting policies discussed therein are those that we consider to be the most critical. We consider an accounting policy to be critical if the policy is subject to a material level of judgment and if changes in those judgments are reasonably likely to materially impact our results.
Recently Issued Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Our exposure to market risk is directly related to revenue from service and management fees earned based upon a percentage of assets on our platform. In the three months ended March 31, 2020 and 2019, 98% and 97% of our total revenue, respectively, was based on the market value of assets on our platform and were recurring in nature. We expect this percentage to vary over time. A 1% decrease in the aggregate value of assets on the platform at the beginning of the period for the three months ended March 31, 2020 and 2019 would have caused our total revenue to decline by 1% and 1%, respectively, and would have caused our pre-tax income to decline by 42% and 10%, respectively, assuming we did not initiate additional expense measures in response to a market decline.
Interest Rate Risk
Changes in interest rates will impact our spread-based revenue. As of March 31, 2020, client cash assets participating in the insured cash deposit program at ATC totaled $3.0 billion. A change in short-term interest rates of 100 basis points at the beginning of the period for the three months ended March 31, 2020 would result in an increase or decrease in income before income taxes of approximately $1.9 million on an annual basis (based on total client cash assets at December 31, 2019) and subject to any changes to interest credited to the end-investor). Actual impacts may vary depending on interest rate levels and the significance of change.
Additionally, changes to interest rates will impact the cost of our borrowing. Borrowing under both the Term Loan and the Revolver bears interest at (x) LIBOR plus a margin of 3.50%, with a step down to 3.25% or (y) the Alternate Base Rate, as defined and specified in the Credit Agreement, plus a margin of 2.50%, with a stepdown to 2.25%, in each case based on our achievement of a specified first-lien leverage ratio. Additionally, the Term Loan’s margin was reduced by 0.25% following the IPO. With respect to the Revolver, a quarterly fee of 0.50% is due for the unused amounts thereunder, with a stepdown to 0.375% based on our achievement of a specified first-lien leverage ratio. If LIBOR-based interest rates increased by 100 basis points, our interest expense on an annualized basis would increase by approximately $1.2 million based on amounts drawn down under the Term Loan as of March 31, 2020 and assuming no draw down of the Revolver.
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Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems, including potential inefficiencies driven by the implementation of a remote workforce during the COVID-19 pandemic and inadequacies or breaches in our control processes. We operate in diverse markets and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct and quantifiable than market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper action by employees or advisers, we could suffer financial loss, regulatory sanctions and damage to our reputation and in times of high market volatility the financial losses from operational risk as well as the likelihood of such losses may increase. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate. To mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees operate within established corporate policies and limits.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”)) as of March 31, 2020. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2020, our disclosure controls and procedures were effective, at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of all possible controls and procedures. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.
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We are, from time to time, involved in various legal proceedings, litigation and regulatory matters that arise in the normal course of our business. We do not believe that the resolutions of any such matters we are currently involved in, individually or in the aggregate, will have a material adverse impact on our financial condition or results of operations. However, we can provide no assurance that any pending or future matters will not have a material effect on our financial condition or results of operations in the future.
Risks Related to Our Business and Operations
Our revenue may fluctuate from period to period, which could cause our share price to fluctuate.
Our revenue may fluctuate from period to period in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following events, as well as other factors described elsewhere in this Quarterly Report on Form 10-Q:
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a decline or slowdown of the growth in the value of financial market assets or changes in the mix of assets on our platform, which may reduce the value of our platform assets and therefore our revenue and cash flows; |
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a lowering of interest rates that will directly and proportionately impact our spread-based revenue; |
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significant fluctuations in securities prices affecting the value of assets on our platform, including as a result of public health concerns or epidemics such as the recent COVID-19 pandemic; |
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negative public perception and reputation of the financial services industry, which would reduce demand for our investment solutions and services; |
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unanticipated acceleration of client investment preferences to lower-fee options; |
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downward pressure on fees we charge our investor clients, which would reduce our revenue; |
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changes in laws or regulations that could impact our ability to offer investment solutions and services; |
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failure to obtain new clients or retain existing clients on our platform, or changes in the mix of clients on our platform; |
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failure by our financial adviser clients to obtain new investor clients or retain their existing investor clients; |
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failure to adequately protect our proprietary technology and intellectual property rights; |
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reduction in the suite of investment solutions and services made available by third-party providers to existing clients; |
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reduction in fee percentage or total fees for future periods, which may have a delayed impact on our results given that our asset-based fees are billed to advisers in advance of each quarter; |
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changes in our pricing policies or the pricing policies of our competitors to which we have to adapt; or |
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general domestic and international economic and political conditions that may decrease investor demand for financial advisers or investment services. |
As a result of these and other factors, our results of operations for any quarterly or annual period may differ materially from our results of operations for any prior or future quarterly or annual period and should not be relied upon as indications of our future performance.
We operate in an intensely competitive industry, with many firms competing for business from financial advisers on the basis of the quality and breadth of investment solutions and services, ability to innovate, reputation and the prices of services, among other factors, and this competition could hurt our financial performance.
We compete with many different types of companies that vary in size and scope, including other TAMPs. In addition, some of our adviser clients have developed or may develop the in-house capability to provide the technology or investment advisory services they have retained us to perform. These clients may also offer internally developed services to their financial advisers, obviating the need to hire us, and they may offer these services to third-party financial advisers or financial institutions, thereby competing directly with us for that business.
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Some of our competitors have greater name recognition or greater resources than we do, and may offer a broader range of services across more markets. These resources may allow our competitors to respond more quickly to new technologies or changes in demand for investment solutions and services, devote greater resources to developing and promoting their services and make more attractive offers to potential clients and strategic partners, which could hurt our financial performance. Further, some of our competitors operate in a different regulatory environment than we do, which may give them certain competitive advantages in the services they offer.
We compete on a number of bases including the performance of our technology, the level of fees charged, the quality of our services, our reputation and position in the industry, our ability to adapt to technological developments or unforeseen market entrants and our ability to address the complex and changing needs of our clients. Our failure to successfully compete on the basis of any of these factors could result in a significant decline in market share, revenue and net income.
We derive nearly all of our revenue from the delivery of investment solutions and services to clients in the financial advisory industry and our revenue could suffer if that industry experiences a downturn.
We derive nearly all of our revenue from the delivery of investment solutions and services to clients in the financial advisory industry and we are therefore subject to the risks affecting that industry. A decline or lack of growth in demand for financial advisory services would adversely affect the financial advisers who work with us and, in turn, our results of operations, financial condition or business. For example, the availability of free or low-cost investment information and resources, including research and information relating to publicly traded companies and mutual funds available on the Internet or on company websites, could lead to lower demand by investors for the services provided by financial advisers. In addition, demand for our investment solutions and services among financial advisers could decline for many reasons. Consolidation or limited growth in the financial advisory industry could reduce the number of financial advisers and their potential clients. Events that adversely affect financial advisers’ businesses, rates of growth or the numbers of customers they serve, including decreased demand for their products and services, adverse conditions in the markets or adverse economic conditions generally, could decrease demand for our investment solutions and services and thereby decrease our revenue. Any of the foregoing could have a material adverse effect on our results of operations, financial condition or business.
Investors that pay us an asset-based fee may seek to negotiate a lower fee percentage, choose to use lower revenue products or cease using our services, which could limit the growth of our revenue or cause our revenue to decrease.
We derive a significant portion of our revenue from asset-based fees. Individual advisers or their clients may seek to negotiate a lower asset-based fee percentage. In particular, recent trends in the broker-dealer industry towards zero-commission trading may make self-directed brokerage services comparatively less expensive, and therefore more attractive to investors, than investment adviser services, which could prompt our investment adviser clients to attempt to renegotiate the fees they pay to us. In addition, clients may elect to use products that generate lower revenue, which may result in lower total fees being paid to us. For example, one of our broker-dealer clients recently decided to limit its advisers’ access to certain of our retail share class strategies, which may cause these advisers to shift to lower-revenue products offered on our platform. If other broker-dealer clients similarly limit access to certain of our strategies such that advisers shift to our lower-revenue products, we may be required to shift our service offering towards lower-revenue products, which would lead to a decline in asset-based revenue. In addition, we recently announced plans to transition certain third-party mutual fund strategies from retail to institutional share classes, which have lower operating expense ratios than our retail share class mutual fund offerings. This transition, which we expect to take effect in June 2020, will result in a lower overall cost of investment for clients, and coupled with changes in pricing for these products, we expect that it will negatively impact our revenue and net income. Further, as competition among financial advisers increases, financial advisers may be required to lower the fees they charge to their end investors, which could cause them to seek lower fee options on our platform or to more aggressively negotiate the fees we charge. Any reduction in asset-based fees could persist beyond the near term given the recurring quarterly nature of our asset-based fee arrangements. Any of these factors could result in a fluctuation or decline in our asset-based revenue, which would have a material adverse effect on our results of operations, financial condition or business.
Investors may redeem or withdraw their investment assets generally at any time. Significant changes in investing patterns or large-scale withdrawal of investment funds could have a material adverse effect on our results of operations, financial condition or business.
The clients of our financial advisers are generally free to change financial advisers, forgo the advice and other services provided by financial advisers or withdraw the funds they have invested with financial advisers. These clients of financial advisers may elect to change their investment strategies, including by withdrawing all or a portion of their assets from their accounts to avoid securities markets-related risks. These actions by investors are outside of our control and could materially adversely affect the market value of our platform assets, which could materially adversely affect the asset-based revenue we receive.
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Changes in market and economic conditions could lower the value of assets on which we earn revenue and could decrease the demand for our investment solutions and services.
Asset-based revenue makes up a significant portion of our revenue, representing 92% and 90% of our total revenue for the three months ended March 31, 2020 and 2019, respectively. In addition, given our fee-based model, we expect that asset-based revenue will continue to account for a significant percentage of our total revenue in the future. Spread-based revenue accounted for 7% and 8% of our total revenue for the three months ended March 31, 2020 and 2019, respectively. Significant fluctuations in securities prices, as well as recent and potential decreases in interest rates, materially affect the value of the assets managed by our clients and may cause a decrease in our spread-based revenue. In particular, our spread-based revenue is directly correlated with changes in interest rates; in the first quarter of 2020, interest rates in the U.S. approached zero, our spread-based revenue have similarly declined significantly. Changes in interest rates may also influence financial adviser and investor decisions regarding whether to invest in, or maintain an investment in, one or more of our investment solutions. If such fluctuations in securities prices or decreases in interest rates were to lead to decreased investment in the securities markets, our revenue and earnings derived from asset-based and spread-based revenue could be simultaneously materially adversely affected.
We provide our investment solutions and services to the financial services industry. The financial markets, and in turn the financial services industry, are affected by many factors, such as U.S. and foreign economic and geopolitical conditions and general trends in business and finance that are beyond our control, and could be adversely affected by changes in the equity or debt marketplaces, unanticipated changes in currency exchange rates, interest rates, inflation rates, the yield curve, financial crises, war, terrorism, natural disasters, pandemics and outbreaks of disease or similar public health concerns such as the recent COVID-19 pandemic and other factors that are difficult to predict. In the event that the U.S. or international financial markets suffer a severe or prolonged downturn, investments may lose value and investors may choose to withdraw assets from financial advisers and use the assets to pay expenses or transfer them to investments that they perceive to be more secure, such as bank deposits and Treasury securities. Any prolonged downturn in financial markets, or increased levels of asset withdrawals could have a material adverse effect on our results of operations, financial condition or business.
We must continue to introduce new investment solutions and services, and enhancements thereon, to address our clients’ changing needs, market changes and technological developments, and a failure to do so could have a material adverse effect on our results of operations, financial condition or business.
The market for our investment solutions and services is characterized by shifting client demands, evolving market practices and, for many of our investment solutions and services, rapid technological change, including an increased use of and reliance on web and social network properties. Changing client demands (including increased reliance on technology), new market practices or new technologies can render existing investment solutions and services obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop and enhance investment solutions and services that address the future needs of our target markets and respond to technological and market changes. We may not be able to accurately estimate the impact of new investment solutions and services on our business or how their benefits will be perceived by our clients. Further, we may not be successful in developing, introducing and marketing our new investment solutions or services or enhancements on a timely and cost effective basis, or at all, and our new investment solutions and services and enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. In addition, clients may delay purchases in anticipation of new investment solutions or services or enhancements. Any of these factors could materially adversely affect our results of operations, financial condition or business.
We could face liability or incur costs to remediate operational errors or to address possible customer dissatisfaction.
Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. Operational risk may also result from potential inefficiencies driven by the implementation of a remote workforce during the COVID-19 pandemic. We operate in diverse markets and are reliant on the ability of our employees and systems to process large volumes of transactions often within short time frames. In the event of a breakdown or improper operation of systems, due to extreme market volumes or volatility, the failure or delay of systems for a remote workforce, human error or improper action by employees, we could suffer financial loss, regulatory sanctions or damage to our reputation. In addition, there may be circumstances when our customers are dissatisfied with our investment solutions and services, even in the absence of an operational error. In such circumstances, we may elect to make payments or otherwise incur increased costs or lower revenue to maintain customer relationships. In any of the forgoing circumstances, our results of operations, financial condition or business could be materially adversely affected.
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We may make future acquisitions which may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our stockholders.
We have in the past, and may in the future, choose to grow our business in part through acquisitions, which could pose a number of risks to our operations. We may not be able to complete acquisitions, or integrate the operations, products, technologies or personnel gained through any such acquisition, such as our recent acquisitions of Global Financial Private Capital and OBS Financial, without a material adverse effect on our results of operations, financial condition or business. Assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business. We may have difficulty integrating the acquired operations, products, technologies or personnel, and may incur substantial unanticipated integration costs. Financing an acquisition could result in dilution from issuing equity securities or a weaker balance sheet from using cash or incurring debt. Any debt securities that we issue or credit agreements into which we enter to finance an acquisition may contain covenants that would restrict our operations, impair our ability to pay dividends or limit our ability to take advantage of other strategic opportunities. Further, we may fail to realize the potential cost savings or other financial benefits of the acquisition. In addition, acquisitions, including our recent acquisitions of Global Financial Private Capital and OBS Financial, may result in the loss of key employees or customers, particularly those of the acquired operations. Acquisitions, including our recent acquisitions of Global Financial Private Capital and OBS Financial, could further adversely affect our existing business relationships with third parties and/or cause us to incur regulatory, legal or other liabilities from the acquired businesses, including claims for infringement of intellectual property rights, for which we may not be indemnified in full or at all.
We may be subject to liability for losses that result from a breach of our fiduciary duties.
Certain of our investment advisory services involve fiduciary obligations that require us to act in the best interests of our clients, and we may be sued and face liabilities, regulatory investigations or enforcement actions for actual or claimed breaches of our fiduciary duties. Because we provide investment advisory services with respect to substantial assets, we could face substantial liability to our clients if it is determined that we have breached our fiduciary duties. In certain circumstances, which generally depend on the types of investment solutions and services we are providing, we may enter into client agreements jointly with advisers and retain third-party investment money managers and strategists on behalf of clients. We are responsible for conducting due diligence on the investment solutions and strategies offered by such third parties with whom we partner, and a failure to adequately conduct due diligence could subject us to liability for misstatements or omissions contained in marketing and other materials describing the investment solutions and strategies offered by such third parties to our investor clients. As such, we may be included as a defendant in lawsuits against financial advisers, strategists and third-party investment money managers that involve claims of breaches of the duties of such persons, and we may face liabilities for the improper actions and/or omissions of such advisers and third-party investment money managers and strategists. In addition, we may face claims based on the results of our investment advisory services, even in the absence of a breach of our fiduciary duty. Such claims and liabilities could therefore have a material adverse effect on our results of operations, financial condition or business.
If our reputation is harmed, our results of operations, financial condition or business could be materially adversely affected.
Our reputation, which depends on earning and maintaining the trust and confidence of our clients, is critical to our business. Our reputation is vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, lawsuits initiated by our clients, employee misconduct, perceptions of conflicts of interest and rumors, among other developments, could substantially damage our reputation, even if they are baseless or satisfactorily addressed. Potential, perceived and actual conflicts of interest are inherent in our business activities and could give rise to client dissatisfaction or litigation. In particular, we offer both proprietary and third-party mutual funds, portfolios of mutual funds and custodial services on our platform, and financial advisers or their clients could conclude that we favor our proprietary investment products or services over those of third parties. In addition, any perception that the quality of our investment solutions and services may not be the same or better than that of other providers can also damage our reputation. Any damage to our reputation could harm our ability to attract and retain clients, which could materially adversely affect our results of operations, financial condition or business.
If our investment solutions and services fail to perform properly due to undetected errors or similar problems, our results of operations, financial condition or business could be materially adversely affected.
Investment solutions and services we develop or maintain may contain undetected errors or defects despite testing. Such errors can exist at any point in the life cycle of our investment solutions or services, but are typically found after introduction of new investment solutions and services or enhancements to existing investment solutions or services. We continually introduce new investment solutions and services and new versions of existing solutions and services. Our third-party providers, including asset managers whose products our clients access through our platform, could fail to detect errors or defects in the offered products that our clients use. Despite internal testing and testing by current and prospective clients, our current and future investment solutions and services may contain serious defects or malfunctions. If we detect any errors before release, we might be required to delay the release
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of the investment solution or service for an extended period of time while we address the problem. We might not discover errors that affect our new or current investment solutions, services or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Errors may occur that could have a material adverse effect on our results of operations, financial condition or business and could result in harm to our reputation, lost sales, delays in commercial release, third-party claims, contractual disputes, contract terminations or renegotiations or unexpected expenses and diversion of management and other resources to remedy errors. In addition, negative public perception and reputational damage caused by such claims would adversely affect our client relationships and our ability to enter into new contracts. Any of these problems could have a material adverse effect on our results of operations, financial condition or business.
Our failure to successfully execute the conversion of our clients’ assets from their existing technology platform to our platform in a timely and accurate manner could have a material adverse effect on our results of operations, financial condition or business.
When we begin working with a new client, or acquire new client assets through an acquisition or other transaction, we may be required to convert the new assets from the clients’ existing technology platform to our technology platform. These conversions sometimes present significant technological and operational challenges, can be time-consuming, may result in the loss of the target company’s clients and may divert management’s attention from other operational challenges. If we fail to successfully complete our conversions in a timely and accurate manner, we may be required to expend more time and resources than anticipated, which could erode the profitability of the client relationship. In addition, any such failure may harm our reputation and may cause financial advisers or their clients to move their assets off of our platform or make it less likely that prospective clients will commit to working with us. Any of these risks could materially adversely affect our results of operations, financial condition or business.
Our business relies heavily on computer equipment, electronic delivery systems and the Internet. Any failures, disruptions or other adverse impacts could result in reduced revenue and the loss of customers.
The success of our business depends upon our ability to deliver time-sensitive, up-to-date data and information. Our business relies heavily on computer equipment (including servers), electronic delivery systems and the Internet, but these technologies are vulnerable to disruptions, failures or slowdowns caused by fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, Internet failures, cyber-attacks and other events beyond our control. In addition to such vulnerabilities, there can be no assurance that the Internet’s infrastructure will continue to be able to support the demands placed on it by sustained growth in the number of users and amount of traffic and, to the extent that the Internet’s infrastructure is unable to support the demands placed on it, our business may be impacted. Similarly, the reduction in the growth of, or a decline in, broadband and Internet access poses a risk to us, in particular during periods of office closure necessitating the implementation of an entirely remote workforce relying largely upon home broadband and internet access.
Furthermore, we rely on agreements with our suppliers, such as our current data hosting and service providers, to provide us with access to certain computer equipment, electronic delivery systems and the Internet. We are unable to predict whether a future contractual dispute may arise with one of our suppliers that could cause a disruption in service, or whether our agreements with our suppliers can be obtained or renewed on acceptable terms, or at all. An unanticipated disruption, failure or slowdown affecting our key technologies or facilities may have significant ramifications, such as data-loss, data corruption, damaged software codes or inaccurate processing of transactions. We maintain off-site back-up facilities for our electronic information and computer equipment, but these facilities could be subject to the same interruptions that may affect our primary facilities. Any significant disruptions, failures, slowdowns, data-loss or data corruption could have a material adverse effect on our results of operations, financial condition or business and result in the loss of customers.
If government regulation of the Internet changes, or if consumer attitudes towards the Internet change, we may need to change the manner in which we conduct our business or incur greater operating expenses.
We rely heavily on the Internet in conducting our business. The adoption, modification or interpretation of laws or regulations relating to the Internet could adversely affect the manner in which we conduct our business. Such laws and regulations may cover sales practices, taxes, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts, consumer protection, broadband residential Internet access and the characteristics and quality of services. Moreover, it is not clear how existing laws governing these matters apply to the Internet. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, we may be required to incur additional expenses or alter our business model, either of which could have a material adverse effect on our results of operations, financial condition or business.
Inadequacy or disruption of our disaster recovery plans and procedures in the event of a catastrophe could adversely affect our business.
We have made a significant investment in our infrastructure, and our operations are dependent on our ability to protect the continuity of our infrastructure against damage from catastrophe or natural disaster, breach of security, cyber-attack, loss of power, telecommunications failure, including regional or global health events such as the recent COVID-19 pandemic or other natural or
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man-made events. Such a catastrophic event could have a direct negative impact on us by adversely affecting financial advisers, our employees or facilities and our ability to serve clients using an entirely remote workforce, or an indirect impact on us by adversely affecting the financial markets or the overall economy. While we have implemented business continuity and disaster recovery plans and maintain business interruption insurance, it is impossible to fully anticipate and protect against all potential catastrophes. If our business continuity and disaster recovery plans and procedures were disrupted, inadequate or unsuccessful in the event of a catastrophe, we could experience a material adverse interruption of our operations.
We serve financial advisers and their clients using third-party data centers and cloud services. While we have electronic access to the infrastructure and components of our platform that are hosted by third parties, we do not control the operation of these facilities. Consequently, we may be subject to service disruptions as well as failures to provide adequate support for reasons that are outside of our direct control. These data centers and cloud services are vulnerable to damage or interruption from a variety of sources, including earthquakes, floods, fires, power loss, system failures, cyber-attacks, physical or electronic break-ins, human error or interference (including by employees, former employees or contractors), and other catastrophic events, including regional or global health events such as the recent COVID-19 pandemic. Our data centers may also be subject to local administrative actions, changes to legal or permitting requirements and litigation to stop, limit or delay operations. Despite precautions taken at these facilities, such as disaster recovery and business continuity arrangements, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in interruptions or delays in our services, impede our ability to scale our operations or have other adverse impacts upon our business.
We are reliant on our relationships with certain broker-dealers and strategists, the loss of which could adversely affect our results of operations, financial condition or business.
We maintain relationships with certain broker-dealers who serve clients on our platform. The loss of these relationships likely would result in a loss of adviser and investor clients. Likewise, we engage strategists who offer certain investment products on our platform. The loss of certain strategists and their investment products could cause our investor clients to leave our platform to follow such strategists and investment products to our competitors or otherwise. Additionally, the engagement contracts governing our relationships with these broker-dealers and strategists are terminable by either us or the broker-dealer or strategist, as applicable, upon short-notice with or without cause. Loss of our investor clients, whether due to termination of a significant number of engagement contracts or otherwise, may have a material adverse effect on our financial condition and result in harm to our business.
We are dependent on third-party service providers in our operations.
We utilize numerous third-party service providers in our operations, including for the development of new product offerings, the provision of custodial, strategy and other services and the maintenance of our proprietary systems. A failure by a third-party service provider could expose us to an inability to provide contractual services to our clients in a timely manner. Additionally, if a third-party service provider is unable to provide these services, we may incur significant costs to either internalize some of these services or find a suitable alternative. We serve as the investment adviser for several of the products offered through our investment management programs and utilize the services of investment sub-advisers to manage many of these assets. A failure in the performance of our due diligence processes and controls related to the supervision and oversight of these firms in detecting and addressing conflicts of interest, fraudulent activity, data breaches and cyber-attacks, noncompliance with relevant securities and other laws could cause us to suffer financial loss, regulatory sanctions or damage to our reputation.
We are dependent on third-party pricing services for the valuation of securities invested in our investment products.
The majority of the securities held by our investment products are valued using quoted prices from active markets gathered by external third-party pricing services. Securities for which market prices are not readily available are valued in accordance with procedures applicable to that investment product. These procedures may utilize unobservable inputs that are not gathered from any active markets and involve considerable judgment. If these valuations prove to be inaccurate, our revenue and earnings from platform assets could be adversely affected.
We rely on our key personnel and principals.
We depend on the efforts of our executive officers, other management team members, employees and principals. Our executive officers, in particular, play an important role in the stability and growth of our business, and our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. The loss of any key personnel could have a material adverse effect on our results of operations, financial condition or business.
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Principal, employee or third-party provider misconduct could expose us to significant legal liability and reputational harm.
We are vulnerable to reputational harm because we and our investment adviser clients operate in an industry in which personal relationships, integrity and the confidence of clients are of critical importance. Our management team and employees, as well as the management teams and employees at our investment adviser clients or our third-party service providers, could engage in misconduct that adversely affects our business. For example, if a member of management or an employee were to engage in illegal or suspicious activities, we or our investment adviser clients could be subject to regulatory sanctions and we could suffer serious harm to our reputation (as a consequence of the negative perception resulting from such activities), our financial position or financial advisers’ client relationships and ability to attract new clients. In addition, certain of our third-party providers may engage in illegal activities, which could result in disruptions to our platform or solutions, subject us to liability, fines, penalties, regulatory orders or reputational harm or require us to be involved in regulatory investigations. Further, our business and that of our financial adviser clients often require that we deal with confidential information, personal information and other sensitive data. If principals, employees or third-party providers were to improperly use or disclose this information, even if inadvertently, we or our financial adviser clients could be subject to legal or regulatory investigations or action and suffer serious harm to our reputation, financial position and current and future business relationships or those of our financial adviser clients. It is not always possible to deter misconduct, and the precautions we take to detect and prevent this activity may not always be effective. Misconduct by management, employees or third-party providers, or even unsubstantiated allegations of misconduct, could result in an adverse effect on our reputation and our business.
We could face liability related to our storage of personal information about our users.
We store extensive amounts of personal investment and financial information for consumers, including portfolio holdings, on our systems. We could be subject to liability if we were to inappropriately disclose any personal information or if third parties were able to penetrate our network security or otherwise access or misappropriate any personally identifiable information or portfolio holdings. Any such disclosure, security incident or breach could subject us to regulatory investigations and enforcement actions, the imposition of fines or other significant penalties and significant remediation costs, as well as claims for financial loss, impersonation or other similar fraud claims, claims under data protection laws, claims for other misuses of personal information, such as unauthorized marketing or unauthorized access to personal portfolio information, or indemnity claims by our clients for fines, penalties or other assessments arising from third-party claims. While we have taken extensive precautions to protect personal information, these risks are heightened due to the recent implementation of an entirely remote workforce due to the COVID-19 pandemic. Further, any real or perceived defects, errors or vulnerabilities in our security systems could harm our reputation or otherwise adversely impact our business, financial position and results of operations.
We could face liability for certain information we provide, including information based on data we obtain from other parties.
We may be subject to claims for securities law violations, negligence, breach of fiduciary duties or other claims relating to the information we provide. For example, individuals may take legal action against us if they rely on information we have provided and it contains an error. In addition, we could be subject to claims based upon the content that is accessible from our website through links to other websites. Moreover, we could face liability based on inaccurate information provided to us by others. Defending any such claims could be expensive and time-consuming, and any such claim could materially adversely affect our results of operations, financial condition or business.
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We are exposed to data and cyber-security risks that could result in data breaches, service interruptions, harm to our reputation, protracted and costly litigation or significant liability.
In connection with the products and services that we provide, we collect, use, store, transmit and otherwise process certain confidential, proprietary and sensitive information, including the personal information of end-users, third-party service providers and employees. We rely on the efficient, uninterrupted and secure operation of complex information technology systems and networks to operate our business and securely store, transmit and otherwise process such information. In the normal course of business, we also share information with our service providers and other third parties. A failure to safeguard the integrity, confidentiality, availability and authenticity of personal information, client data and our proprietary data from cyber-attacks, unauthorized access, fraudulent activity (e.g., check “kiting” or fraud, wire fraud or other dishonest acts), data breaches and other security incidents that we, our third-party service providers or our clients may experience may lead to modification, destruction, loss of availability or theft of critical and sensitive data pertaining to us, our clients or other third parties. We have established a strategy designed to protect against threats and vulnerabilities containing preventive and detective controls including, but not limited to, firewalls, intrusion detection systems, computer forensics, vulnerability scanning, server hardening, penetration testing, anti-virus software, data leak prevention, encryption and centralized event correlation monitoring. While we have taken extensive precautions to protect personal information, these risks are heightened due to the recent implementation of an entirely remote workforce due to the COVID-19 pandemic. All such protective measures, as well as additional measures that may be required to comply with rapidly evolving data privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations, have and will continue to create uncertainty and cause us to incur substantial expenses. Failure to timely upgrade or maintain computer systems, software and networks as necessary could also make us or our third-party service providers susceptible to breaches and unauthorized access and misuse. We may be required to expend significant additional resources to modify, investigate or remediate vulnerabilities or other exposures arising from data and cyber-security risks.
Improper access to our or our third-party service providers’ systems or databases could result in the theft, publication, deletion or modification of confidential, proprietary or sensitive information, including personal information. An actual or perceived breach of our security systems or those of our third-party service providers may require notification under applicable data privacy regulations or contractual obligations. The accidental or unauthorized access to or disclosure, loss, destruction, disablement, corruption or encryption of, use or misuse of or modification of our, our clients’ or other third parties’ confidential, proprietary or sensitive information, including personal information, by us or our third-party service providers could result in significant fines, penalties, orders, sanctions and proceedings or actions against us by governmental bodies and other regulatory authorities, customers or third parties, which could materially and adversely affect our business, financial condition and results of operations. Any such proceeding or action, and any related indemnification obligations, could damage our reputation, force us to incur significant expenses in defense of such proceeding or action, distract our management, increase our costs of doing business or result in the imposition of financial liability.
Despite our efforts to ensure the integrity, confidentiality, availability, and authenticity of our proprietary systems and information, it is possible that we may not be able to anticipate or to implement effective preventive measures against all cyber threats. No security solution, strategy, or measures can address all possible security threats or block all methods of penetrating a network or otherwise perpetrating a security incident. The risk of unauthorized circumvention of our security measures or those of our third-party providers, clients and partners has been heightened by advances in computer and software capabilities and the increasing sophistication of hackers, including those operating on behalf of nation-state actors, who employ complex techniques involving the theft or misuse of personal and financial information, counterfeiting, “phishing” or social engineering incidents, account takeover attacks, denial or degradation of service attacks, malware, fraudulent payment and identity theft. Because the techniques used by hackers change frequently and are increasingly complex and sophisticated, and new technologies may not be identified until they are launched against a target, we and our third-party service providers may be unable to anticipate these techniques or detect an incident, assess its severity or impact, react or appropriately respond in a timely manner or implement adequate preventative measures. Our systems are also subject to compromise from internal threats, such as theft, misuse, unauthorized access or other improper actions by employees, service provides and other third parties with otherwise legitimate access to our systems or databases. The latency of a compromise is often measured in months, but could be years, and we may not be able to detect a compromise in a timely manner.
Due to applicable laws and regulations or contractual obligations, we may also be held responsible for any failure or cybersecurity breaches attributed to our third-party service providers as they relate to the information we share with them. Although we generally have agreements relating to data privacy and security in place with our third-party service providers, they are limited in nature and we cannot guarantee that such agreements will prevent the accidental or unauthorized access to or disclosure, loss, destruction, disablement, corruption or encryption of, use or misuse of or modification of confidential, proprietary or sensitive information, including personal information, or enable us to obtain reimbursement from third-party service providers in the event we should suffer incidents resulting in accidental or unauthorized access to or disclosure, loss, destruction, disablement or encryption of, use or misuse of or modification of confidential, proprietary or sensitive information, including personal information. In addition, because we do not control our third-party service providers and our ability to monitor their data security is limited, we cannot ensure
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the security measures they take will be sufficient to protect confidential, proprietary or sensitive information (including personal information).
Regardless of whether a security incident or act of fraud involving our solutions is attributable to us or our third-party service providers, such an incident could, among other things, result in improper disclosure of information, harm our reputation and brand, reduce the demand for our products and services, lead to loss of client business or confidence in the effectiveness of our security measures, disrupt normal business operations or result in our systems or products and services being unavailable. In addition, such incidents may require us to spend material resources to investigate or correct the incident and to prevent future security incidents, expose us to uninsured liability, increase our risk of regulatory scrutiny, expose us to protracted and costly litigation, trigger indemnity obligations, result in damages for contract breach, divert the attention of management from the operation of our business and otherwise cause us to incur significant costs or liabilities, any of which could affect our financial condition, results of operations and reputation. Moreover, there could be public announcements regarding any such incidents and any steps we take to respond to or remediate such incidents, and if securities analysts or investors perceive these announcements to be negative, it could, among other things, have a substantial adverse effect on the price of our common stock. In addition, our remediation efforts may not be successful. Further, any adverse findings in security audits or examinations could result in reputational damage to us, which could reduce the use and acceptance of our solutions, cause our customers to cease doing business with us or have a significant adverse impact on our revenue and future growth prospects. Furthermore, even if not directed at us specifically, attacks on other financial institutions could disrupt the overall functioning of the financial system or lead to additional regulation and oversight by federal and state agencies, which could impose new and costly compliance obligations.
If we are not able to satisfy data protection, security, privacy and other government- and industry-specific requirements or regulations, our results of operations, financial condition or business could be harmed.
Personal privacy, data protection, information security and other regulations are significant issues in the United States. We are subject to a variety of laws and regulations that apply to our collection, use, retention, protection, disclosure, transfer and other processing of personal information, and our handling of personal data is regulated by the U.S. federal government and various state and local governments and regulatory agencies. In addition to such laws and regulations, we may also be subject to self-regulatory standards or other rules pertaining to information security and data protection proposed by privacy advocates, industry groups, other self-regulatory bodies or other information security or data protection-related organizations. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards. Further, our contractual arrangements may also impose additional, or more stringent, obligations upon us relating to our collection, use, retention, protection, disclosure, transfer and other processing of personal, financial and other data.
The data protection landscape is rapidly evolving, and we expect that there will continue to be new proposed laws, regulations and industry standards, and changes to and in the interpretation of existing laws, regulations and standards, concerning privacy, data protection, information security and telecommunications services. Interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and we cannot yet determine the impact such future laws, regulations and standards, or changes to and in the interpretation of existing laws, regulations and standards, may have on our business, but they may result in greater public scrutiny and escalated levels of enforcement and sanctions, increased compliance costs, increased liabilities, restrictions on our operations or other adverse impacts upon our business. For example, evolving and changing definitions of personal information and personal data, especially related to the classification of IP addresses, machine identification, location data and other information, may limit or inhibit our ability to operate or expand our business, including limiting the sharing of data.
Recently, the most rapid development in U.S. data privacy and security law has been at the state level. For example, on June 28, 2018, California enacted the California Consumer Privacy Act (the “CCPA”), which took effect on January 1, 2020. The CCPA increases privacy rights for California residents and imposes obligations on companies that process their personal information, including an obligation to provide certain new disclosures to such residents. Specifically, among other things, the CCPA creates new consumer rights, and imposes corresponding obligations on covered businesses, relating to the access to, deletion of and sharing of personal information collected by covered businesses, including California residents’ right to access and delete their personal information, opt out of certain sharing and sales of their personal information and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action is expected to increase the likelihood of, and risks associated with, data breach litigation. The CCPA was amended in September 2018 and November 2019, and further amendments may be enacted. It remains unclear how various provisions of the CCPA will be interpreted and enforced, and multiple states have enacted or expected to enact similar laws. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., which could increase our potential liability and adversely affect our business. The CCPA and other similar state laws may require us to modify our data processing practices and policies and may increase our compliance costs and potential liability. There is also discussion in Congress of a new comprehensive federal data protection and privacy law to which we likely would be subject if it is enacted.
Many statutory requirements include obligations for companies to notify individuals of security breaches involving certain personal information, which could result from breaches experienced by us or our third-party service providers. For example, laws in all 50 U.S. states require businesses to provide notice to customers whose personal information has been disclosed as a result of a data breach. These laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly.
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Moreover, states have been frequently amending existing laws, requiring attention to changing regulatory requirements. In addition, we may be contractually required to notify clients, end-investors or other counterparties of a security breach. Although we may have contractual protections with our third-party service providers, any security breach, or actual or perceived non-compliance with privacy or security laws, regulations, standards, policies or contractual obligations, could harm our reputation and brand, expose us to potential liability and require us to expend significant resources on data security and in responding to any such incident or actual or perceived non-compliance. Any contractual protections we may have from our third-party service providers may not be sufficient to adequately protect us from any such liabilities and losses, and we may be unable to enforce any such contractual protections.
We make public statements about our use and disclosure of personal information through our privacy policy, information provided on our website and press statements. Although we endeavor to comply with our public statements and documentation, we may at times fail to do so or be alleged to have failed to do so. The publication of our privacy policy and other statements that provide promises and assurances about data privacy and security can subject us to potential government or legal action if they are found to be deceptive, unfair or misrepresentative of our actual practices. In addition, from time to time, concerns may be expressed about whether our products and services compromise the privacy of clients and others. Even the perception, whether or not valid, of privacy concerns or any failure by us to comply with our posted privacy policies or with any legal or regulatory requirements, standards, certifications or orders or other privacy or consumer protection-related laws and regulations applicable to us may harm our reputation, inhibit adoption of our products by current and future customers or adversely impact our ability to attract and retain workforce talent.
Given the complexity of operationalizing data privacy and security laws and regulations to which we are subject, the maturity level of proposed compliance frameworks and the relative lack of guidance in the interpretation of the numerous requirements of the data privacy and security laws and regulations to which we are subject, we may not be able to respond quickly or effectively to regulatory, legislative and other developments, and these changes may in turn impair our ability to offer our existing or planned products and services or increase our cost of doing business. Although we work to comply with applicable laws and regulations, industry standards, contractual obligations and other legal obligations, such laws, regulations, standards and obligations are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. In addition, they may conflict with other requirements or legal obligations that apply to our business or the features and services that our adviser clients and their investor clients expect from our products and services. As such, we cannot assure ongoing compliance with all such laws, regulations, standards and obligations. Any failure, or perceived failure, by us to adequately address privacy and security concerns, even if unfounded, or to comply with applicable laws, regulations and standards, or with employee, client and other data privacy and data security requirements pursuant to contract and our stated privacy notice(s), could result in investigations or proceedings against us by data protection authorities, governmental entities or others, including class action privacy litigation in certain jurisdictions, which could subject us to fines, civil or criminal liability, public censure, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (in relation to both existing and prospective clients), or we could be required to fundamentally change our business activities and practices, which may not be possible in a commercially reasonable manner, or at all. Any or all of these consequences could have a material adverse effect on our operations, financial performance and business.
If third parties infringe upon our intellectual property or if we were to infringe upon the intellectual property of third parties, we may expend significant resources enforcing or defending our rights or suffer competitive injury.
Our success depends in part on our proprietary technology. We rely on a combination of copyright, trademark and trade secret laws, confidentiality, nondisclosure, non-interference and invention assignment agreements and other contractual and technical security measures to establish and protect our intellectual property and proprietary rights. If we fail to successfully obtain, maintain, enforce, monitor, police or defend our intellectual property rights, or if we were to infringe on the intellectual property rights of others, our competitive position, operations, financial condition or business could suffer.
We license certain trademark and web domain rights from third parties and may be subject to claims of infringement if such parties do not possess the necessary intellectual property rights. In addition, we may face additional risk of infringement or misappropriation claims if we hire an employee who possesses third-party proprietary information who decides to use such information in connection with our investment solutions, services or business processes without such third party’s authorization. Furthermore, third parties may in the future assert intellectual property infringement claims against our customers, which, in certain circumstances, we have agreed to indemnify.
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In some instances, litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that we have infringed their intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, could result in substantial costs to us and divert the attention of our management, which could harm our results of operations, financial condition or business. In addition, any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property and proprietary rights, subject us to significant liabilities or require us to seek licenses on unfavorable terms or make changes to the investment services and solutions we offer, any of which could harm our results of operations, financial condition or business.
Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our proprietary technologies, investment solutions and services. To protect our proprietary rights, we enter into confidentiality, nondisclosure, non-interference and invention assignment agreements with our employees, consultants and independent contractors. However, we cannot guarantee that we have entered into such agreements with each party that has or may have had access to our trade secrets and proprietary know-how. Further, these agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our technologies, investment solutions or products or obtaining and using information that we regard as proprietary. Moreover, these agreements may not provide an adequate remedy in the event of such unauthorized disclosures of confidential information and we cannot assure you that our rights under such agreements will be enforceable. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could reduce any competitive advantage we have developed and cause us to lose customers or otherwise harm our business.
The use of “open source code” in investment solutions may expose us to additional risks and harm our intellectual property rights.
We rely on code and software licensed under so-called “open source licenses” to some extent to develop our investment solutions and support our internal systems and infrastructure. While we monitor our use of open source code to attempt to avoid subjecting our investment solutions to conditions we do not intend, such use could occur. Many of the risks associated with the usage of open source software cannot be eliminated, and could, if not properly addressed, negatively impact our business. In the event that portions of our proprietary software are determined to be subject to an open source license that requires that we make available source code for modifications or derivative works we create based upon the open source software, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, any of which could reduce or eliminate the value of our technologies and solutions. Additionally, if a third-party software provider has incorporated certain types of open source code into software we license from such third party for our investment solutions, we could, under certain circumstances, be required to disclose the source code for our investment solutions. This could harm our intellectual property position and have a material adverse effect on our results of operations, financial condition or business.
We may become subject to liability based on the use of our investment solutions and services by our clients.
Our investment solutions and services support the investment processes of our clients, which, in the aggregate, manage billions of dollars of assets. Our client agreements have provisions designed to limit our exposure to potential liability claims brought by our adviser clients, their clients or other third parties based on the use of our investment solutions and services. However, these provisions have certain exceptions and could be invalidated by unfavorable judicial decisions or by federal, state, foreign or local laws. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for significant dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. Such claims and lawsuits could therefore have a material adverse effect on our results of operations, financial condition or business.
Furthermore, our clients may use our investment solutions and services together with software, data or products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our investment solutions and services do not cause these problems, the existence of these errors might cause us to incur significant costs and divert the attention of our management and technical personnel, any of which could materially adversely affect our results of operations, financial condition or business.
Lack of liquidity or access to capital could impair our business and financial condition.
We expend significant resources investing in our business, particularly with respect to our technology and service platforms. In addition, we must maintain certain levels of required capital. As a result, reduced levels of liquidity could have a significant negative
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effect on us. Some potential conditions that could negatively affect our liquidity include diminished access to debt or capital markets, unforeseen or increased cash or capital requirements, adverse legal settlements or judgments or illiquid or volatile markets.
The capital and credit markets continue to experience varying degrees of volatility and disruption and can be particularly sensitive in times of uncertainty and volatility. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for businesses similar to ours. Such market conditions may limit our ability to satisfy statutory capital requirements, generate fee and other market-related revenue to meet liquidity needs and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue different types of capital than we would otherwise, less effectively deploy such capital or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility.
In the event that our current resources are insufficient to satisfy our needs, we may need to rely on financing sources such as bank debt. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity and the possibility that our stockholders, advisers or lenders could develop a negative perception of our long- or short-term financial prospects if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating organizations take negative actions against us.
We may not be able to generate sufficient cash to service our indebtedness and may be forced to take other actions to satisfy our obligations under our Credit Facility, which may not be successful.
As of March 31, 2020, we had total indebtedness of $123.7 million. Our ability to make scheduled payments on or to refinance our indebtedness depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay acquisitions and capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis could harm our ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our Credit Facility (as defined in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”) currently restricts our ability to dispose of assets and our use of the proceeds from such disposition. We may not be able to consummate those dispositions, and the proceeds of any such disposition may not be adequate to meet any debt service obligations then due. Any of these circumstances could adversely affect our results of operations, financial condition or business.
Restrictions in our existing and future debt agreements could limit our growth and our ability to engage in certain activities.
Our Credit Facility contains a number of covenants that impose operating and financial restrictions on us, including restrictions on our ability to incur additional indebtedness, create liens, make acquisitions, dispose of assets and make restricted payments, among others. In addition, our Credit Facility may require us to maintain certain financial ratios. These restrictions may also limit our ability to obtain future financings, to withstand a future downturn in our business or the economy in general, or to otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of acquisitions or other business opportunities that arise because of the limitations that the restrictive covenants under our Credit Facility impose on us. A breach of any covenant in our Credit Facility would result in a default under the applicable agreement after any applicable grace periods. A default, if not waived, could result in acceleration of the indebtedness outstanding under the Credit Facility and our inability to borrow under the Revolver (as defined in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”). The accelerated indebtedness would become immediately due and payable. If that occurs, we may not be able to make all of the required payments or borrow on short notice sufficient funds to refinance such indebtedness. Even if new financing were available at that time, it may not be on terms that are acceptable to us.
Our insurance coverage may be inadequate or expensive.
We maintain voluntary and required insurance coverage, including, among others, general liability, property, director and officer, errors and omissions, network cyber-security and privacy, employee practices liability, fidelity bond and fiduciary liability insurance and insurance required under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Recently in
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the insurance industry, premiums and deductible costs associated with certain insurance coverage have increased, and the number of insurers has decreased. If such trends continue, our insurance costs may increase, which may affect our financial condition. Further, while we endeavor to purchase coverage that is appropriate to our assessment of our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages. Our business may be negatively affected if in the future our insurance proves to be inadequate or unavailable. In addition, insurance claims may harm our reputation or divert management resources away from operating our business.
We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations.
We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions to meet any existing or future debt service and other obligations. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or other distributions to us. In addition, SEC and FINRA regulations may under certain circumstances restrict the payment of dividends by a registered broker-dealer. Compliance with this regulation may impede our ability to receive dividends from AssetMark Brokerage, LLC.
Our controls and procedures may fail or be circumvented, our risk management policies and procedures may be inadequate and operational risks could adversely affect our reputation and financial condition.
We have adopted policies and procedures to identify, monitor and manage our operational risk. These policies and procedures, however, may not be fully effective. Some of our risk evaluation methods depend upon information provided by others and public information regarding markets, clients or other matters that are otherwise accessible by us. If our policies and procedures are not fully effective or we are not successful in capturing all risks to which we are or may be exposed, we may suffer harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse effect on our business, results of operations or financial condition.
Risks Related to Our Controlling Stockholder’s Ultimate Parent Being a PRC Company with Stock Listed in Hong Kong and Shanghai.
Our controlling stockholder is subject to supervision by regulatory authorities in the PRC and must comply with certain PRC laws and regulations that may influence our controlling stockholder’s decisions relating to our business.
As a Delaware corporation with revenue and operations exclusively within the United States, we are not subject to regulation by foreign authorities. However, because our controlling stockholder is an enterprise incorporated under the laws of the People’s Republic of China (“PRC”), our controlling stockholder is subject to and must comply with PRC laws and regulations promulgated by PRC governmental authorities. Such regulations may influence the decisions of our controlling stockholder, as well as those of its director appointees serving on our board of directors, regarding our business and operations. Certain of these regulations require our controlling stockholder to approve specific corporate actions taken by us, including any amendment to our certificate of incorporation; certain mergers, acquisitions, asset sales and divestments that we may seek to undertake; and certain related-party transactions in which we are involved. In addition, certain PRC regulations require our controlling stockholder to file with or obtain approval from various PRC regulators before approving certain of our corporate actions, including:
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obtaining approval from or filing with the China National Development and Reform Commission (the “NDRC”), for certain debt issuances by us, or certain investments we seek to make involving a sensitive industry, country or region, as defined by the NDRC; and |
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filing with the China Securities Regulatory Commission (the “CSRC”), and registering with the State Administration of Foreign Exchange, to provide us with financing or to guarantee our obligations. |
In addition, PRC regulations require our controlling stockholder to ensure that our business focuses on securities, futures, asset management, broker-dealer services, financial information services, financial information technology system services, back-office support services for specific financial businesses or products or other financial-related businesses. A failure by our controlling stockholder to comply with these or other existing or future PRC laws or regulations could result in the imposition of administrative or financial sanctions against our controlling stockholder by PRC authorities. These laws and regulations could cause our controlling stockholder and its director appointees serving on our board of directors to act in a manner that may not be perceived to be in the best interests of our other stockholders. Likewise, any failure by our controlling stockholder to obtain certain approvals, make requisite filings or otherwise comply with PRC laws and regulations could materially limit our ability to raise debt financing or make certain investments, any of which could have a material adverse effect on our financial condition or business.
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Our controlling stockholder is required by the stock exchanges on which its shares are listed to disclose and obtain approval from its board of directors or shareholders for certain corporate actions that we undertake.
HTSC is listed on The Shanghai Stock Exchange and The Stock Exchange of Hong Kong Limited, and is therefore subject to the Rules Governing the Listing of Stocks on The Shanghai Stock Exchange (the “SSE Listing Rules”), and the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “HKEx Listing Rules”). Under the SSE Listing Rules and the HKEx Listing Rules, HTSC must obtain approval from its board of directors and/or shareholders for certain major transactions in which we, as a subsidiary of HTSC, engage, including the purchase or sale of assets, mergers and acquisitions, lending, leasing of assets, donation or acceptance of assets, debt restructuring, license agreements, research and development joint ventures, and related-party transactions, the value of which exceeds certain financial thresholds established by the applicable listing rules. In addition, the HKEx Listing Rules require our controlling stockholder to obtain shareholder approval for (i) any issuance of shares by us that results in a reduction of HTSC’s equity interest in us in excess of a specified dilution threshold, (ii) the implementation of a share option scheme involving the issuance of new shares by us and (iii) any issuance of debt by us outside the ordinary course of our business.
There can be no assurance that HTSC will obtain the requisite approvals if we desired to enter into any of the above transactions, and a failure to do so would restrict our ability to engage in such transactions. Furthermore, PRC regulators including the CSRC, The Shanghai Stock Exchange or The Stock Exchange of Hong Kong Limited could impose additional restrictions or approval requirements that could impact our ability to undertake certain corporate actions. We cannot guarantee that our controlling stockholder will be able to successfully or timely obtain any of the approvals needed to permit us to undertake any of the corporate actions described above, and the failure to do so may have a material adverse effect on our results of operations, financial condition or business.
The Committee on Foreign Investment in the United States (“CFIUS”) may modify, delay or prevent our future acquisition or investment activities.
For so long as HTSC retains a material ownership interest in us, we will be deemed a “foreign person” under the regulations relating to CFIUS. As such, acquisitions of or investments in U.S. businesses or foreign businesses with U.S. subsidiaries that we may wish to pursue may be subject to CFIUS review, the scope of which was recently expanded by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), to include certain non-passive, non-controlling investments (including certain investments in entities that hold or process personal information about U.S. nationals), certain acquisitions of real estate even with no underlying U.S. business, transactions the structure of which is designed or intended to evade or circumvent CFIUS jurisdiction and any transaction resulting in a “change in the rights” of a foreign person in a U.S. business if that change could result in either control of the business or a covered non-controlling investment. FIRRMA also subjects certain categories of investments to mandatory filings. If a particular proposed acquisition or investment in a U.S. business falls within CFIUS’s jurisdiction, we may determine that we are required to make a mandatory filing or that we will submit to CFIUS review on a voluntary basis, or to proceed with the transaction without submitting to CFIUS and risk CFIUS intervention, before or after closing the transaction. CFIUS may decide to block or delay an acquisition or investment by us, impose conditions with respect to such acquisition or investment or order us to divest all or a portion of a U.S. business that we acquired without first obtaining CFIUS approval, which may limit the attractiveness of or prevent us from pursuing certain acquisitions or investments that we believe would otherwise be beneficial to us and our stockholders. In addition, among other things, FIRRMA authorizes CFIUS to prescribe regulations defining “foreign person” differently in different contexts, which could result in less favorable treatment for investments and acquisitions by companies from countries of “special concern.” If such future regulations or other actions by the U.S. government impose additional burdens on acquisition and investment activities involving PRC and PRC-controlled entities, our ability to consummate transactions that might otherwise be beneficial to us and our stockholders may be hindered.
Risks Related to Regulation and Litigation
We are subject to extensive government regulation in the United States, and our failure or inability to comply with these regulations or regulatory action against us could adversely affect our results of operations, financial condition or business.
The financial services industry is among the most extensively regulated industries in the United States. We operate investment advisory, broker-dealer, mutual fund and custodial businesses, each of which is subject to a specific and extensive regulatory scheme. In addition, we are subject to numerous state and Federal laws and regulations of general application. It is very difficult to predict the future impact of the legislative and regulatory requirements affecting our business and our clients’ businesses.
Certain of our subsidiaries are registered as “investment advisers” with the SEC under the Investment Advisers Act of 1940 (as amended, the “Advisers Act”) and are regulated thereunder. In addition, many of our investment advisory services are conducted pursuant to the nonexclusive safe harbor from the definition of an “investment company” provided under Rule 3a-4 under the Investment Company Act of 1940 (as amended, the “1940 Act”). If Rule 3a-4 were to cease to be available, or if the SEC were to modify the rule or its interpretation of how the rule is applied, our business could be adversely affected. Certain of our registered
45
investment adviser subsidiaries provide advice to mutual fund clients. Mutual funds are registered as “investment companies” under the 1940 Act. The Advisers Act and the 1940 Act, together with related regulations and interpretations of the SEC, impose numerous obligations and restrictions on investment advisers and mutual funds, including requirements relating to the safekeeping of client funds and securities, limitations on advertising, disclosure and reporting obligations, prohibitions on fraudulent activities, restrictions on transactions between an adviser and its clients, and between a mutual fund and its advisers and affiliates, and other detailed operating requirements, as well as general fiduciary obligations.
Our subsidiary AssetMark, Inc. is a commodity pool operator registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (the “NFA”). As such, it is subject to regulatory requirements under the Commodity Exchange Act (the “CEA”), CFTC regulations and NFA by-laws and rules. These include disclosure and reporting requirements, restrictions on advertising, registration and licensing of certain personnel and conduct and anti-fraud requirements, among others.
In addition, AssetMark Brokerage, LLC, our limited purpose broker-dealer subsidiary, is subject to regulatory restrictions and requirements imposed by applicable statutes, regulations and policies in the jurisdictions in which we operate. U.S. government agencies and self-regulatory organizations, including U.S. state securities commissions, are empowered to enforce the regulatory restrictions and requirements applicable to us and conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer from registration or membership. AssetMark Brokerage, LLC is registered with the SEC and with all 53 U.S. states and jurisdictions as a limited purpose broker-dealer providing mutual fund distribution and underwriting, and is a member of FINRA, a securities industry self-regulatory organization that supervises and regulates the conduct and activities of its members. As a registered broker-dealer, AssetMark Brokerage, LLC is subject to periodic examinations and investigations by FINRA. Further, broker-dealers are subject to regulations which cover all applicable aspects of their business, which may include sales practices, anti-money laundering, handling of material non-public information, safeguarding data, recordkeeping, reporting and the conduct and qualifications of directors, officers, employees, representatives and other associated persons.
Further, AssetMark Brokerage, LLC, along with our mutual fund businesses, are subject to the Bank Secrecy Act (the “BSA”), as amended by the USA PATRIOT Act of 2001 (the “PATRIOT Act”), and the implementing regulations thereunder, which require financial institutions, including broker-dealers, to establish anti-money laundering compliance programs, file suspicious activity and other reports with the U.S. government and maintain certain records. Broker-dealers and mutual funds must also implement related customer identification procedures and beneficial ownership identification procedures.
Additionally, ATC, our wholly owned trust company subsidiary licensed with and regulated by the Arizona Department of Financial Institutions (“ADFI”), is one of several custodians on our platform that offers integrated custodial, brokerage and related services to clients of our adviser clients.
All of the foregoing laws and regulations are complex and we are required to expend significant resources to monitor and maintain our compliance with such laws and regulations. Any failure on our part to comply with these and other applicable laws and regulations could result in regulatory fines, suspensions of personnel or other sanctions, including revocation of our registration or that of our subsidiaries as an investment adviser, broker-dealer, commodity pool operator or trust company, as the case may be, which could, among other things, require changes to our business practices and scope of operations or harm our reputation, which, in turn could have a material adverse effect on our results of operations, financial condition or business.
Changes to the laws or regulations applicable to us or to our financial adviser clients could adversely affect our results of operations, financial condition or business.
We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC or other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets around the world. In addition, we may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. For example, on June 5, 2019, the SEC voted to adopt a package of rulemakings and interpretations that (i) require broker-dealers to act in the “best interest” of retail customers when making a recommendation, without placing the financial or other interests of the broker-dealer ahead of the interest of the retail customer (“Reg BI”), (ii) require that broker-dealers and investment advisers deliver to retail investors a short-form disclosure document (Form CRS) describing the firm’s relationship with and duties to the customer, (iii) clarify the scope of the “solely incidental” exception to Advisers Act registration by brokers when providing investment advice and (iv) clarify the SEC’s views on the fiduciary duty that investment advisers owe to their clients. The compliance date for Reg BI and Form CRS is June 30, 2020. Many broker-dealers and investment advisers appear to be re-evaluating their business models in light of Reg BI and other similar regulatory changes, and any ultimate change to their business models may affect their desire or ability to use our services and may therefore adversely affect our business. Legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations, as well as any deficiencies in our compliance with such legislation and regulation, could result in significant loss of
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revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging or otherwise adversely affect our businesses.
It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any current proposals will become law, and it is difficult to predict how any changes or potential changes could affect our business. Changes to laws or regulations could increase our potential liability in connection with the investment solutions and services that we provide. The introduction of any new laws or regulations could make our ability to comply with applicable laws and regulations more difficult and expensive. Any of the foregoing could have a material adverse effect on our results of operations, financial condition or business.
If we experience material weaknesses or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. Until such time as we are no longer an “emerging growth company,” our independent registered public accounting firm will not be required to attest as to our internal controls over financial reporting. If we fail to identify or remediate any material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, if we are unable to conclude that our internal controls over financial reporting are effective or if, once required, our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. As a result of any such failures, we could also become subject to stockholder or other third-party litigation, as well as investigations by the NYSE, the SEC or other regulatory authorities, which could result in fines, trading suspensions or other remedies, harm our reputation and financial condition or divert financial and management resources from our regular business activities.
Failure to comply with ERISA and Internal Revenue Code regulations could result in penalties against us.
We are subject to ERISA and Sections 4975(c)(1)(A), (B), (C) and (D) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) and to regulations promulgated thereunder, insofar as we act as a “fiduciary” under ERISA with respect to certain benefit plan clients or otherwise deal with benefit plan clients. ERISA and applicable provisions of the Internal Revenue Code impose duties on persons who are fiduciaries under ERISA, prohibit specified transactions involving ERISA plan clients (including, without limitation, employee benefit plans (as defined in Section 3(3) of ERISA), individual retirement accounts and Keogh plans) and impose monetary penalties for violations of these prohibitions. Our failure to comply with these requirements could result in significant penalties against us that could have a material adverse effect on our business (or, at worst, severely limit the extent to which we could act as a fiduciary for any plans under ERISA).
We are subject to litigation and regulatory examinations and investigations.
The financial services industry faces substantial regulatory risks and litigation. Like many firms operating within the financial services industry, we are experiencing a difficult regulatory environment across our markets. Our current scale and reach as a provider to the financial services industry, the increased regulatory oversight of the financial services industry generally, new laws and regulations affecting the financial services industry, ever-changing regulatory interpretations of existing laws and regulations and the retroactive imposition of new interpretations through enforcement actions have made this an increasingly challenging and costly regulatory environment in which to operate. These examinations or investigations, including any enforcement action brought by the SEC against us relating to any failure to comply with our settlement agreement dated August 25, 2016 (relating to allegations of misleading performance advertisements created by F-Squared Investments, Inc., one of our former investment strategists) could result in the identification of matters that may require remediation activities or enforcement proceedings by the regulator. The direct and indirect costs of responding to these examinations, or of defending ourselves in any litigation could be significant. Additionally, actions brought against us may result in settlements, awards, injunctions, fines and penalties. The outcome of litigation or regulatory action is inherently difficult to predict and could have an adverse effect on our ability to offer some of our products and services.
Failure to properly disclose conflicts of interest could harm our reputation, results of operations or business.
We are party to certain compensation arrangements pursuant to which we receive payments based on client assets invested in certain investment products, including ETFs, proprietary mutual funds and third-party mutual funds. In certain circumstances, such arrangements allow us to receive payments from multiple parties based on the same client asset. Further, we operate as an investment adviser; our status as a registered investment adviser subjects us to a legal obligation to operate under the fiduciary standard. The SEC and other regulators have increased their scrutiny of potential conflicts of interest, and we have implemented policies and procedures
47
to mitigate such conflicts of interest. However, if we fail to fully disclose conflicts of interest, become subject to retroactive determinations that past disclosures were not sufficient or if our policies and procedures are not effective, we could face reputational damage, litigation or regulatory proceedings or penalties, any of which may adversely affect our reputation, results of operations or business.
In the event of a change of control of our company, we may be required to obtain FINRA approval and the consent of our advisory clients to the change of control, and any failure to obtain these consents could adversely affect our results of operations, financial condition or business.
As required by the Advisers Act, the investment advisory agreements entered into by our investment adviser subsidiaries provide that an “assignment” of the agreement may not be made without the client’s consent. Under the 1940 Act, advisory agreements with registered funds provide that they terminate automatically upon “assignment” and the board of directors and the shareholders of the registered funds must approve a new agreement for advisory services to continue. Under both the Advisers Act and the 1940 Act, a change of ownership may constitute such an “assignment” if it is a change of control. For example, under certain circumstances, an assignment may be deemed to occur if a controlling block of voting securities is transferred, if any party acquires control, or, in certain circumstances, if a controlling party gives up control. Under the 1940 Act, a 25% voting interest is presumed to constitute control. HTSC, through its indirect subsidiary Huatai International Investment Holdings Limited (“HIIHL”), held a 70.3% voting interest in us as of March 31, 2020. An assignment or a change of control could be deemed to occur in the future if we, or one of our investment adviser subsidiaries, were to gain or lose a controlling person, or in other situations that may depend significantly on the facts and circumstances. In any such case we would seek to obtain the consent of our advisory clients, including any funds, to the assignment. Further, our U.S. broker-dealer subsidiary, AssetMark Brokerage, LLC, is a member of FINRA and subject to FINRA rules, which could impede or delay a change of control. FINRA’s Rule 1017 generally provides that FINRA approval must be obtained in connection with any transaction resulting in a single person or entity acquiring or controlling, directly or indirectly, 25% or more of a FINRA member firm’s or its parent company’s equity. If we fail to obtain such consents or approval, our results of operations, financial condition or business could be adversely affected.
Risks Related to Ownership of Our Common Stock
Control by our principal stockholder could adversely affect our other stockholders.
HTSC, through its indirect subsidiary HIIHL, owned approximately 70.3% of our outstanding shares of common stock as of March 31, 2020, and controls our management and affairs, including determining the outcome of matters requiring stockholder approval. So long as HTSC continues to own a significant amount of the outstanding shares of our common stock, even if such amount is less than a majority, HTSC will continue to be able to strongly influence or effectively control our decisions, including matters requiring approval by our stockholders (including the election of directors and the approval of mergers or other extraordinary transactions), regardless of whether or not other stockholders believe that the transaction is in their own best interests. Such concentration of voting power could also have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
Further, HTSC and its affiliates engage in a broad spectrum of activities, including investments in the financial services industry in particular. In the ordinary course of their businesses, HTSC and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. In addition, HTSC or an affiliate may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. Further, although we are a stand-alone public company, a subsidiary of HTSC will remain our majority stockholder and may from time to time make strategic decisions that may be different from the decisions that we would have made on our own. HTSC’s decisions with respect to us or our business may be resolved in ways that favor HTSC and therefore HTSC’s own stockholders, which may not coincide with the interests of our stockholders. Although our audit committee reviews and approves all proposed related party transactions, including any transactions between us and HTSC, we may not be able to resolve certain conflicts of interest, or the resolution may be less favorable to us and our stockholders.
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Our stock price may be volatile, and the value of our common stock may decline.
The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. In addition, the limited public float of our common stock tends to increase the volatility of its trading price, in particular during times of high volatility in the broader stock market. Factors that could cause fluctuations in the market price of our common stock include the following:
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market conditions in the broader stock market in general, or in our industry in particular; |
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actual or anticipated fluctuations in our quarterly financial and operating results; |
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introduction of new products and services by us or our competitors; |
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issuance of new or changed securities analysts’ reports or recommendations; |
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sales of large blocks of our stock by our employees or controlling stockholder or the perception that our controlling stockholder will sell our stock; |
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additions or departures of key personnel; |
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regulatory developments; litigation and governmental investigations; and |
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economic, political and geopolitical conditions or events, including public health concerns or epidemics such as the recent COVID-19 pandemic. |
These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial defense costs. Such a lawsuit could also divert the time and attention of our management from our business.
An active market for our common stock may not be sustained, which may inhibit the ability of our stockholders to sell shares of our common stock.
Although we have listed our common stock on the NYSE under the symbol “AMK,” we cannot assure you that an active trading market for our common stock will continue on that exchange or elsewhere. Accordingly, we cannot assure you of the likelihood of your ability to sell your shares of our common stock when desired, the prices that you may be able to obtain for your shares or the liquidity of any trading market.
Future sales of a substantial number of shares of our common stock in the public market could cause the price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that sales may have on the prevailing price of our common stock.
Specifically, HIIHL, the holder of 50,873,799 shares of our common stock, has the right, subject to certain exceptions and conditions, to require us to register its shares of common stock under the Securities Act and to participate in future registrations of securities by us. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the applicable registration statement. In addition, the shares of our common stock already issued to employees or reserved for future issuance under our 2019 Equity Incentive Plan will become eligible for sale in the public market once such shares are issued, subject to various vesting arrangements and Rule 144, as applicable. A total of 4,887,691 shares of common stock have been reserved for issuance under our 2019 Equity Incentive Plan.
The market price of shares of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse if such stockholders sell shares or if HIIHL exercises its registration rights, or if the market perceives that such sales or exercise is likely to occur. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities. In the future, we may also issue our securities in connection with investments or acquisitions, and such issuances could constitute a material portion of the then-outstanding shares of our common stock. Any issuance of additional securities in connection therewith may result in additional dilution to our stockholders.
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If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or describe us or our business in a negative manner, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, if we fail to meet the expectations and forecasts for our business provided by securities analysts, our stock price could decline.
We are a “controlled company” within the meaning of the NYSE listing standards and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
HTSC, through its indirect subsidiary HIIHL, controls a majority of the voting power of our common stock. As a result, we are a “controlled company” within the meaning of the NYSE listing standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the NYSE, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. We rely on some or all of these exemptions. As a result, we do not have a majority of independent directors and our compensation and nominating and corporate governance committees do not consist entirely of independent directors. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act, and we have elected to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”
As a public company, we are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements is time-consuming and may result in increased costs to us and could have a negative effect on our results of operations, financial condition or business.
We are subject to the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act, as well as the corporate governance requirements of the NYSE. Expenses incurred by public companies for reporting and governance purposes have generally been increasing and may continue to increase, and these requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with our periodic reporting requirements and to maintain and improve the effectiveness of our disclosure controls and procedures, we have committed and will continue to commit significant resources, hire additional staff and provide additional management oversight. We have implemented and will continue to implement additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our results of operations, financial condition or business.
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As an “emerging growth company” as defined in the JOBS Act, we have elected to take advantage of certain temporary exemptions from various reporting requirements including, but not limited to, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and certain disclosure obligations regarding executive compensation in our periodic reports and proxy statements. In addition, we have and may continue to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, as permitted by the JOBS Act.
When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
Our management has limited experience managing a public company, and our current resources may not be sufficient to fulfill our public company obligations.
As a public company, we are subject to various regulatory requirements, including those of the SEC and the NYSE. These requirements relate to, among other matters, record keeping, financial reporting and corporate governance. Our management team has limited experience in managing a public company, and our internal infrastructure may not be adequate to support our increased regulatory obligations. Further, we may be unable to hire, train or retain necessary staff and may initially be reliant on engaging outside consultants or professionals to overcome our lack of experience. Our business could be adversely affected if our internal infrastructure is inadequate, we are unable to engage outside consultants or are otherwise unable to fulfill our public company obligations.
Some provisions of Delaware law and our certificate of incorporation and bylaws may deter third parties from acquiring us.
Our amended and restated certificate of incorporation and our amended and restated bylaws provide for, among other things:
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a staggered board and restrictions on the ability of our stockholders to fill a vacancy on the board of directors; |
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the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; |
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advance notice requirements for stockholder proposals; |
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certain limitations on convening special stockholder meetings; and |
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the amendment of certain provisions of our certificate of incorporation and bylaws only by the affirmative vote of the holders of at least two-thirds in voting power of all outstanding shares of our stock entitled to vote thereon, voting together as a single class. |
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions than you desire.
Delaware law may delay or prevent a change in control, and may discourage bids for our common stock at a premium over its market price.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”). These provisions prohibit large stockholders, in particular a stockholder owning 15% or more of the outstanding voting stock, from consummating a merger or combination with a corporation unless such stockholder receives board approval for the transaction or 66 2/3% of the shares of voting stock not owned by such stockholder approve the transaction. These provisions of Delaware law may have the effect of delaying, deferring or preventing a change in control, and may discourage bids for our common stock at a premium over its market price.
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Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware and the federal district courts of the United States as the sole and exclusive forums for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is, to the fullest extent permitted by applicable law, the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees, agents or trustees to us or our stockholders, (iii) any action asserting a claim against us or any director or officer or other employee of ours arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim against us or any director or officer or other employee of ours that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. This provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.
Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States are the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the federal securities laws of the United States. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated certificate of incorporation described in the preceding sentences.
These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. If any court of competent jurisdiction were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our results of operations or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
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Exhibit Number |
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Exhibit Description |
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Form |
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File No. |
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Exhibit |
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Filing Date |
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Filed Herewith |
3.1 |
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Amended and Restated Certificate of Incorporation of the Company |
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S-1/A |
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333-232312 |
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3.1 |
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July 8, 2019 |
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3.2 |
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8-K |
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001-38980 |
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3.1 |
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July 22, 2019 |
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4.1 |
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X |
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21.1 |
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X |
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31.1 |
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X |
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31.2 |
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X |
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32.1* |
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X |
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32.2* |
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X |
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101.INS |
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XBRL Instance Document |
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X |
101.SCH |
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XBRL Taxonomy Extension Schema Document |
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X |
101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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X |
101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
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X |
101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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# |
Indicates management contract or compensatory plan, contract or agreement. |
* |
The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates them by reference. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, on the day of May 13, 2020.
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ASSETMARK FINANCIAL HOLDINGS, INC. |
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By: |
/s/ Charles Goldman |
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Charles Goldman |
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Chief Executive Officer |
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(Principal Executive Officer) |
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By: |
/s/ Gary Zyla |
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Gary Zyla |
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Chief Financial Officer |
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(Principal Financial Officer) |
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Exhibit 4.1
REGISTRATION RIGHTS AGREEMENT
by and between
AssetMark Financial Holdings, Inc.
and
Huatai International Investment Holdings Limited
Dated as of July 17, 2019
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Section 1. |
1 |
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Section 2. |
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Section 3. |
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Section 4. |
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Section 5. |
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Section 6. |
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Section 7. |
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Section 8. |
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Section 9. |
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Section 10. |
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Section 11. |
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THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 17, 2019, is by and between AssetMark Financial Holdings, Inc., a Delaware corporation (the “Company”), and Huatai International Investment Holdings Limited, a company organized under the laws of the Cayman Islands (“Huatai”).
WHEREAS, in connection with the Company’s initial public offering (the “IPO”) of its shares of common stock, par value $0.001 per share (the “Common Stock”), the parties desire to enter into this Agreement to grant certain registration rights to Huatai on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valid consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:
Section 1.Certain Definitions.
(a)The following terms shall have the following meanings:
“Affiliate” of any Person means any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person. The term “control” (including the terms “controlling,” “controlled” and “under common control with”) as used with respect to any Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
“Agreement” means this Registration Rights Agreement, including all amendments, modifications and supplements and any exhibits or schedules to any of the foregoing, and shall refer to this Registration Rights Agreement as the same may be in effect at the time such reference becomes operative.
“beneficially own” means, with respect to any Person, securities of which such Person or any of such Person’s Affiliates, directly or indirectly, has “beneficial ownership” as determined pursuant to Rule 13d-3 and Rule 13d-5 of the Exchange Act, including securities beneficially owned by others with whom such Person or any of its Affiliates has agreed to act together for the purpose of acquiring, holding, voting or disposing of such securities; provided that a Person shall not be deemed to “beneficially own” (i) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates until such tendered securities are accepted for payment, purchase or exchange, (ii) any security as a result of an oral or written agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (a) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act, and (b) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report). Without limiting the foregoing, a Person shall be deemed to be the beneficial owner of all Registrable Shares owned of record by any majority-owned subsidiary of such Person.
“Common Stock” has the meaning set forth in the second Recital hereto.
“Company” has the meaning set forth in the first paragraph of this Agreement.
“Damages” has the meaning set forth in Section 8(a).
“Demand Registration” has the meaning set forth in Section 2(a).
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Form S-1” means a registration statement on Form S-1 under the Securities Act or such successor forms thereto permitting registration of securities under the Securities Act.
“Form S-3” means a registration statement on Form S-3 under the Securities Act or such successor forms thereto permitting registration of securities under the Securities Act.
“Governmental Entity” means any national, federal, state, municipal, local, territorial, foreign or other government or any department, commission, board, bureau, agency, regulatory authority or instrumentality thereof, or any court, judicial, administrative or arbitral body or public or private tribunal.
“Holder” means Huatai or any Transferee.
“Huatai” has the meaning set forth in the first paragraph of this Agreement. References herein to Huatai shall apply to Transferees, provided that for purposes of all thresholds and limitations herein, the actions of the Transferees shall be aggregated.
“Inspectors” has the meaning set forth in Section 6(a)(viii).
“IPO” has the meaning set forth in the second Recital hereto.
“Lock-Up Agreement” has the meaning set forth in Section 4(a).
“Maximum Offering Size” has the meaning set forth in Section 2(b).
“Minimum Amount” means $60,000,000.
“Non-Requesting Holder” has the meaning set forth in Section 2(a)(i).
“Permitted Transferee” means any Person that is an Affiliate of Huatai.
“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, Governmental Entity or any other entity.
“Piggyback Registration” has the meaning set forth in Section 3(a).
“Prospectus” means the prospectus or prospectuses (whether preliminary or final) included in any Registration Statement and relating to Registrable Shares, as amended or supplemented and including all material incorporated by reference in such prospectus or prospectuses.
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“Records” has the meaning set forth in Section 6(a)(viii).
“Registering Holder” has the meaning set forth in Section 2(a)(i).
“Registrable Shares” means, at any time, (i) the shares of Common Stock received by Huatai pursuant to the dissolution of AssetMark Holdings LLC in connection with the IPO and (ii) any securities issued by the Company after the date hereof in respect of the Common Stock by way of conversion, exchange, stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, but excluding (iii) any and all Common Stock referred to in clauses (i) and (ii) that at any time after the date hereof (a) have been disposed of pursuant to an effective registration statement as declared effective by the SEC, (b) have been sold pursuant to Rule 144 under the Securities Act, (c) have been sold in a transaction where a subsequent public distribution of such securities would not require registration under the Securities Act, (d) are eligible for sale pursuant to Rule 144 under the Securities Act without limitation thereunder on volume or manner of sale, (e) are not outstanding or (f) have been transferred in violation of Section 9 hereof, or to a Person that is not a Permitted Transferee (or any combination of clauses (a), (b), (c), (d), (e) and (f)). It is understood and agreed that, once a security of the kind described in clause (i) or (ii) above becomes a security of the kind described in clause (iii) above, such security shall cease to be a Registrable Share for all purposes of this Agreement and the Company’s obligations regarding Registrable Shares hereunder shall cease to apply with respect to such security.
“Registration Expenses” has the meaning set forth in Section 7(a).
“Registration Statement” means any registration statement of the Company which covers any of the Registrable Shares pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all documents incorporated by reference in such Registration Statement.
“Requesting Holders” has the meaning set forth in Section 2(a)(i).
“SEC” means the Securities and Exchange Commission or any successor agency.
“Securities Act” means the Securities Act of 1933, as amended.
“Shares” means shares of Common Stock and, if at any time “Registrable Shares” includes securities of the Company other than Common Stock, the class or classes of such other securities of the Company.
“Shelf Registration” has the meaning set forth in Section 2(e).
“Suspension Period” has the meaning set forth in Section 2(c)(iv).
“Termination Date” means the first date on which neither Huatai nor a Transferee holds any Registrable Shares.
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“Transferee” means any Permitted Transferee to which Huatai has transferred or assigned all or a portion of its rights hereunder pursuant to Section 10.
“underwritten offering” means a registered offering in which Shares of the Company are sold to one or more underwriters on a firm-commitment basis for reoffering to the public pursuant to an effective registration statement under the Securities Act, other than pursuant to a registration statement on Form S-4 or S-8 or any similar or successor form.
(b)Other Definitional and Interpretative Provisions. Unless the context requires otherwise:
(i)references to any statute, regulation, rule or form as of any time shall mean such statute, regulation, rule or form as amended or modified and shall also include any successor statute, regulation, rule or form from time to time;
(ii)references to any agreement or contract are to that agreement or contract as amended, modified or supplemented from time to time in accordance with the terms hereof and thereof;
(iii)“including” shall be construed as inclusive without limitation, in each case notwithstanding the absence of any express statement to such effect, or the presence of such express statement in some contexts and not in others;
(iv)any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular;
(v)“Writing,” “written” and comparable terms refer to printing, typing and other means of reproducing words (including electronic media) in a visible form;
(vi)references to “Section” are references to Sections of this Agreement;
(vii)words such as “herein,” “hereof,” “hereunder” and words of like import when used in this Agreement refer to this Agreement as a whole;
(viii)captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof;
(ix)references to “business day” mean any day except Saturday, Sunday, any day that is a legal holiday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental action to close;
(x)references from or through any date mean, unless otherwise specified, from and including or through and including, respectively; and
(xi)references to “dollars” and “$” mean U.S. dollars.
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Section 2.Demand Registration.
(a)Right to Request Registration.
(i)Subject to the provisions hereof, if, at any time following the date of the pricing of the IPO until the Termination Date, a Holder or group of Holders holding at least 25% of the Registrable Shares held by all Holders (the “Requesting Holders”) requests registration under the Securities Act of all or part of the Registrable Shares held by such Requesting Holders (a “Demand Registration”), then the Company shall promptly give notice of such requested registration, at least 20 business days prior to the anticipated filing date of the Registration Statement relating to such Demand Registration, to each Holder who did not make such request (the “Non-Requesting Holders”) and thereupon shall use its reasonable best efforts to effect, as promptly as practicable, the registration under the Securities Act of (i) all Registrable Shares for which the Requesting Holders have requested registration under this Section 2(a) and (ii) subject to the restrictions set forth in Section 2(a)(ii), Section 2(c) and Section 3, all Registrable Shares that any Non-Requesting Holder has requested the Company to register by request received by the Company not more than 10 business days after such Non-Requesting Holder receives the Company’s notice of the Demand Registration (such Non-Requesting Holders, together with the Requesting Holders, the “Registering Holders”).
(ii)Promptly after the expiration of the 10-business day-period referred to in Section 2(a)(i), the Company shall notify all Registering Holders of the identities of the other Registering Holders and the number of Registrable Shares requested to be included therein. At any time prior to the effective date of the Registration Statement relating to such Demand Registration, the Requesting Holders may revoke such request, without liability to any of the other Registering Holders, by providing a notice to the Company revoking such request.
(iii)If any of the Registrable Shares covered by a Demand Registration are to be sold in an underwritten offering, the Company shall have the right to select the managing underwriter or underwriters to lead the offering.
(iv)The Company shall be liable for and pay all Registration Expenses in connection with any Demand Registration, regardless of whether such Registration is effected.
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(b)Priority on Demand Registration. If such Demand Registration is an underwritten offering and the managing underwriters of the requested Demand Registration advise the Company and the Requesting Holders that in their opinion the number of Shares proposed to be included in the Demand Registration (including any securities that the Company proposes to include that are not Registrable Shares) exceeds the largest number of Shares which can be sold in such underwritten offering without having an adverse effect on such offering (including the price per share of the Shares proposed to be sold in such underwritten offering) (the “Maximum Offering Size”), the Company shall include in such Demand Registration, in the priority listed below, up to the Maximum Offering Size:
(i)first, all Registrable Shares requested to be registered by the Requesting Holders (in the case of multiple Requesting Holders, allocated, if necessary for the offering not to exceed the Maximum Offering Size, pro rata among such Requesting Holders on the basis of the relative number of Registrable Shares so requested to be included in such Demand Registration by each);
(ii)second, all Registrable Shares requested to be included in such registration by any other Registering Holder (in the case of multiple other Registering Holders, allocated, if necessary for the offering not to exceed the Maximum Offering Size, pro rata among such other Registering Holders on the basis of the relative number of Registrable Shares so requested to be included in such Demand Registration by each such Registering Holder); and
(iii)third, any Shares proposed to be registered by any other Persons (including the Company), with such priorities among them as the Company shall determine.
(c)Restrictions on Demand Registration.
(i)Subject to Section 2(c)(iii), the Company shall not be obligated to effect more than four Demand Registrations in total, other than Demand Registrations to be effected pursuant to a Registration Statement on Form S-3, for which an unlimited total number of Demand Registrations shall be permitted, and in no event shall the Company be required to effect more than one Demand Registration hereunder within any six-month period.
(ii)Neither Huatai nor any Transferee shall be entitled to request a Demand Registration (i) within six months after Huatai or any Transferee has sold Shares in a Piggyback Registration or (ii) at any time when the Company is diligently pursuing a primary or secondary underwritten offering.
(iii)The Company shall not be obligated to effect a Demand Registration unless the aggregate gross proceeds expected to be received from the sale of the Registrable Shares by the Requesting Holders equals or exceeds the Minimum Amount (based on the then-current market prices).
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(iv)The Company may postpone effecting a Registration Statement pursuant to this Section 2 and, if it so chooses, withdraw any Registration Statement that has been filed, on one occasion during any period of six consecutive months for a reasonable time specified in the notice but not exceeding 90 days, if (1) an investment banking firm of recognized national standing shall advise the Company and the Requesting Holders in writing that effecting the registration would materially and adversely affect an offering of securities of the Company the preparation of which had then been commenced, (2) the Company is in possession of material non-public information the disclosure of which during the period specified in such notice the Company reasonably believes would not be in the best interests of the Company, or (3) the Company determines, in good faith and in its sole discretion, that the registration or offering to be delayed would, if not delayed, adversely affect the Company and its subsidiaries taken as a whole or interfere with, or jeopardize the success of, any pending or proposed material transaction, including any debt or equity financing, any acquisition or disposition, any recapitalization or reorganization or any other material transaction, whether due to commercial reasons or any other reason. Any period during which the Company has delayed effecting a Registration Statement pursuant to this Section 2(c)(iv) is herein referred to as a “Suspension Period.” If, pursuant to this Section 2(c)(iv), the Company delays or withdraws a Demand Registration requested by the Requesting Holders, the Requesting Holders shall be entitled to withdraw such request and, if so withdrawn, such request shall not count as a registration for purposes of this Section 2. The Company shall provide prompt written notice to the Registering Holders of the commencement and termination of any Suspension Period (and any withdrawal of a registration statement pursuant to this Section 2(c)(iv)), but shall not be obligated under this Agreement to disclose the reasons therefor. The Registering Holders receiving such notice shall keep the existence of each Suspension Period confidential and refrain from making offers and sales of Registrable Shares (and direct any other Persons making such offers and sales to refrain from doing so) during each Suspension Period. In no event shall a Suspension Period or Suspension Periods be in effect for an aggregate of more than 180 days in any calendar year.
(d)Effective Demand Registration. A Demand Registration shall not be deemed to have occurred:
(i)unless the Registration Statement relating thereto (1) has become effective under the Securities Act and (2) has remained effective for a period of at least 60 days (or such shorter period in which all Registrable Shares of the Registering Holders included in such registration have actually been sold thereunder); provided that such Registration Statement shall not be considered a Demand Registration if (x) after such Registration Statement becomes effective, such Registration Statement or the related offer, sale or distribution of Registrable Shares thereunder is interfered with by any stop order, injunction or other order or restriction imposed by the SEC or any other Governmental Entity for any reason not attributable to the Registering Holders and such interference is not thereafter eliminated so as to permit the completion of the contemplated distribution of Registrable Shares or (y) in the case of an underwritten offering, the conditions specified in the related underwriting agreement, if any, are not satisfied or waived for any reason not attributable to the Registering Holders; and as a result of any such circumstances described in clause (x) or (y), less than 75% of the Registrable Shares covered by such Registration Statement have been sold thereunder; or
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(ii)if the Maximum Offering Size is reduced in accordance with Section 2(b) such that less than 50% of the Registrable Shares of the Requesting Holders sought to be included in such registration are included.
(e)Shelf Registration. At any time when the Company is eligible to use Form S-3 prior to the Termination Date, upon the request of the Requesting Holders, the Company shall use its reasonable best efforts to file a “shelf” registration statement (the “Shelf Registration”) with respect to the Registrable Shares and to cause such Shelf Registration to become effective and to keep such Shelf Registration in effect until the earlier of (x) the three-year anniversary of the most recent effective date of such Shelf Registration and (y) the date the Registering Holders cease to hold any of the Registrable Shares covered by such Shelf Registration. Any offer or sale of Registrable Shares pursuant to the Shelf Registration in any underwritten offering shall be deemed to be a Demand Registration subject to the provisions of this Section 2. The Company may, in its sole discretion, elect to effectuate a Demand Registration pursuant to a Shelf Registration if, at the time the request for such Demand Registration was made, the Company had in effect a Shelf Registration pursuant to which such offering can be effected.
Section 3.Piggyback Registrations.
(a)Right to Piggyback. If, at any time following the IPO at which any Holder owns any Registrable Shares (but prior to the Termination Date), the Company proposes to register any Shares under the Securities Act (other than on a registration statement on Form S-8, F-8, S-4 or F-4 or any other registration relating to Shares issuable upon exercise or vesting of employee equity grants or in connection with any employee benefit plan of the Company or in connection with a direct or indirect acquisition by the Company of another Person), whether for its own account or for the account of one or more holders of Shares (other than the Holders), the Company shall, each such time, give prompt notice at least 10 business days prior to the anticipated filing date of the registration statement relating to such registration to each Holder (to the extent such Holder holds any Registrable Shares on the date such notice is to be sent), which notice shall set forth such Holder’s rights under this Section 3 and shall offer such Holder the opportunity to include in such registration statement the number of Registrable Shares such Holder may request (a “Piggyback Registration”), subject to the provisions of Section 3(b). Upon the request of a Holder made within 5 business days after its receipt of notice from the Company, or such shorter time as is reasonably specified by the Company in light of the circumstances in the case of a primary offering but in no event less than two business days (which request shall specify the number of Registrable Shares requested to be registered in such Piggyback Registration), the Company shall use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Shares with respect to which the Company has received a written request for inclusion therein from such Holder; provided that (i) any Holder requesting to include its Registrable Shares in the Company’s registration must sell its Registrable Shares on the same terms and conditions provided for in the underwriting or other distribution arrangements approved by the Company and that apply to the Company or the other holders of Shares involved in the registration, as applicable, and (ii) if, at any time after giving notice of its intention to register any Shares pursuant to this Section 3(a) and prior to the effective date of the Registration Statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company shall give notice to each Holder that requested its Registrable Shares to be included therein and, thereupon, shall be relieved of its obligation to register any Registrable Shares in connection with such registration. No registration effected under this Section 3 shall relieve the Company of its obligations to effect a Demand Registration to the extent required by Section 2. The Company shall pay all Registration Expenses in connection with each Piggyback Registration.
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(b)Priority on Primary Piggyback Registrations. If a Piggyback Registration is initiated as a primary underwritten offering on behalf of the Company and the managing underwriters advise the Company that in their opinion the number of Shares proposed to be included in such offering exceeds the Maximum Offering Size, the Company shall include in such registration and offering, in the following priority, up to the Maximum Offering Size (i) first, the number of Shares that the Company proposes to sell, and (ii) second, the number of Shares requested to be included therein by holders of Shares, including the Holders (to the extent such Holders have requested to include Registrable Shares in such Piggyback Registration), pro rata among all such holders on the basis of the number of Shares requested to be included therein by such holders or as such holders and the Company may otherwise agree.
(c)Priority on Secondary Piggyback Registrations. If a Piggyback Registration is initiated as an underwritten registration on behalf of a holder of Shares other than a Holder, and the managing underwriters advise the Company that in their opinion the number of Shares proposed to be included in such registration exceeds the Maximum Offering Size, then the Company shall include in such registration (i) first, the number of Shares requested to be included therein by the holder(s) requesting such registration, (ii) second, the number of Shares requested to be included therein by other holders of Shares including the Holders (to the extent such Holders have requested to include Registrable Shares in such Piggyback Registration), pro rata among such holders on the basis of the number of Shares requested to be included therein by such holders or as such holders and the Company may otherwise agree and (iii) third, the number of Shares that the Company proposes to sell.
(d)Selection of Underwriters. If any Piggyback Registration is a primary or secondary underwritten offering, the Company shall have the right to select the managing underwriter or underwriters to administer such offering.
Section 4.Lock-up Arrangements.
(a)If the Company sells Shares or other securities convertible into or exchangeable for (or otherwise representing a right to acquire) Shares in a primary underwritten offering pursuant to any registration statement under the Securities Act (whether or not any Holder is given an opportunity to participate), or if any other Person sells Shares in a secondary underwritten offering pursuant to a Piggyback Registration, and if the managing underwriters for such offering advise the Company (in which case the Company promptly shall notify the Holders), or if the Company determines in its sole discretion, that a public sale or distribution of Shares outside such offering would adversely affect such offering, then, if requested by the Company, neither the Company nor any Holder shall sell, transfer, pledge, issue, grant or otherwise dispose of, directly or indirectly (including by means of any short sale), or request the registration of, any Registrable Shares or former Registrable Shares (or any securities of any Person that are convertible into or exchangeable for, or otherwise represent a right to acquire, any such shares) (except as part of such underwritten offering or with the consent of the underwriters in such offering) (such agreement not to sell, a “Lock-Up Agreement”) during the period beginning 7 days prior to, and extending through the 90th day after, the effective date of the applicable registration statement (or, in the case of an offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule) under the Securities Act, the date that the applicable public offering commences), or such earlier time as the Company and the managing underwriters shall agree. Notwithstanding the foregoing, no Holder shall be obligated to execute a Lock-Up Agreement unless the Company and each other selling stockholder, if any, in such offering also executes agreements substantially similar to such Lock-Up Agreement. The provisions of this Section 4 shall apply as long as any Holder is the beneficial owner of any Registrable Shares or any Shares that were but have ceased to be Registrable Shares.
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(b)Notwithstanding any other provision of this Agreement, the Company shall not be obligated to take any action hereunder that would violate any lock-up or similar restriction binding on the Company in connection with a prior or pending registration or underwritten offering.
Section 5.Participating in Underwritten Offering. No Holder may participate in any underwritten offering hereunder unless such Holder (i) agrees to sell such Holder’s Registrable Shares on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and the provisions of this Agreement in respect of registration rights, including without limitation arranging for any necessary opinions of counsel with respect to such Holder and its Registrable Shares.
Section 6.Registration Procedures.
(a)Whenever a Holder requests that any Registrable Shares be registered pursuant to this Agreement, subject to the provisions of this Agreement, the Company shall use its reasonable best efforts to effect the registration and the sale of such Registrable Shares in accordance with the intended methods of disposition thereof as soon as practical as provided herein, and, pursuant thereto, the Company shall, as soon as practical as provided herein:
(i)use its reasonable best efforts to prepare and file with the SEC a Registration Statement on any form for which the Company then qualifies or that counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Shares to be registered thereunder in accordance with the intended method of distribution thereof and cause such Registration Statement to become effective (unless it is automatically effective upon filing);
(ii)use its reasonable best efforts to prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to comply with the applicable requirements of the Securities Act and to keep such Registration Statement effective for the relevant period required hereunder, but no longer than is necessary to complete the distribution of the Shares covered by such Registration Statement; and before filing such Registration Statement or Prospectus used in connection therewith or any amendments or supplements thereto, if requested, furnish to the Registering Holders and their counsels copies of all such documents proposed to be filed, including documents incorporated by reference in the Prospectus and one set of the exhibits incorporated by reference, and such Holders and their counsels shall have a reasonable opportunity to review and comment on any information pertaining to such Holders that is contained in such Registration Statement or Prospectus (or amendment or supplement thereto);
(iii)furnish to each Registering Holder and each managing underwriter, if any, without charge, conformed copies of each Registration Statement and amendment thereto and copies of each supplement thereto promptly after they are filed with the SEC (but only one set of exhibits thereto need be provided) and deliver, without charge, such
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number of copies of the preliminary and final Prospectus and any supplement thereto as the Registering Holders may reasonably request to facilitate the disposition of the Registrable Shares covered by such Registration Statement in conformity with the requirements of the Securities Act;
(iv)promptly notify the Registering Holders of any stop order issued or threatened by the SEC or any state securities commission and take all reasonable actions required to prevent the entry of such stop order, or to remove or withdraw any order suspending the effectiveness of any Registration Statement, or lift any suspension of the qualification or exemption from qualification of any Registrable Shares for sale in any jurisdiction in the United States;
(v)use reasonable best efforts to register or qualify such Registrable Shares under such other securities or “blue sky” laws of such U.S. jurisdictions as the Registering Holders reasonably request (in light of such Holders’ intended plan of distribution) and continue such registration or qualification in effect in such jurisdictions for as long as the applicable Registration Statement may be required to be kept effective under this Agreement; provided that the Company will not be required to (x) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (y) subject itself to taxation in any such jurisdiction or (z) consent to general service of process in any such jurisdiction;
(vi)promptly notify the Registering Holders , at any time when a Prospectus relating thereto would be required under the Securities Act to be delivered by such distributor, of the occurrence of any event as a result of which the Prospectus included in such Registration Statement contains an untrue statement of a material fact or omits a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and the Company shall use its reasonable best efforts to prepare, as soon as practical, a supplement or amendment to such Prospectus so that, as thereafter delivered to any prospective purchasers of such Registrable Shares, such Prospectus shall not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Registering Holders agree that, upon receipt of any notice form the Company of the happening of any event of the kind described in this subparagraph, the Registering Holders shall immediately discontinue (and direct any other Persons making offers and sales of Registrable Shares to immediately discontinue) offers and sales of the Registrable Shares pursuant to the Registration Statement covering such Registrable Share until the Registering Holders are advised in writing by the Company that the use of the Prospectus may be resumed or it is furnished with a supplemented or amended Prospectus and, if so directed by the Company, the Registering Holders will deliver to the Company all copies, other than permanent file copies then in any Registering Holder’s possession, of the Prospectus covering such Registrable Shares as of the time of receipt of such notice from the Company;
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(vii)in the case of an underwritten offering in which a Holder participates pursuant to a Demand Registration or a Piggyback Registration, enter into customary agreements (including an underwriting agreement in customary form), and take all such other customary and reasonable actions as are reasonably required to expedite or facilitate the disposition of such Registrable Shares (including making members of senior management of the Company available at reasonable times and places to participate in “road shows,” investor calls and similar marketing efforts);
(viii)upon execution of confidentiality agreements in form and substance reasonably satisfactory to the Company (should the Company, in its sole discretion, require such confidentiality agreements), make available for inspection by the Registering Holders and any managing underwriter participating in any disposition pursuant to a Registration Statement being filed by the Company pursuant to this Agreement and any attorney, accountant or other professional retained by the Registering Holders or such managing underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the “Records”) as shall be reasonably necessary or desirable to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information reasonably requested by any Inspector in connection with such Registration Statement. Records that the Company determines, in good faith, to be confidential and that it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (1) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such Registration Statement or (2) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction; provided that in no event shall the Company be required to disclose Records the disclosure of which is prohibited by applicable law or pre-existing applicable contractual restrictions. Each Holder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it or its Affiliates as the basis for any market transactions in the Registrable Shares unless and until such information is made generally available to the public. Each Holder further agrees that, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, it shall give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential;
(ix)use its reasonable best efforts to cause all such Registrable Shares to be listed on any securities exchange or quotation system on which any of the Registrable Shares are then listed or traded;
(x)provide a transfer agent and registrar for all such Registrable Shares not later than the effective date of such Registration Statement;
(xi)furnish to each managing underwriter, if any, a signed counterpart, addressed to such managing underwriter, of (1) an opinion or opinions of counsel to the Company and (2) a comfort letter or comfort letters from the Company’s independent public accountants, each in customary form and covering such matters of the kind customarily covered by opinions or comfort letters, as the case may be, as the managing underwriter reasonably requests;
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(xii)make generally available to its stockholders a consolidated earnings statement (which need not be audited) for a period of 12 months beginning after the effective date of the Registration Statement as soon as reasonably practicable after the end of such period, which earnings statement shall satisfy the requirements of an earnings statement under Section 11(a) of the Securities Act and Rule 158 thereunder; and
(xiii)promptly notify the Registering Holders and the managing underwriter of any underwritten offering, if any:
(1)when the Registration Statement, any pre-effective amendment, the Prospectus or any Prospectus supplement or any post-effective amendment to the Registration Statement has been filed and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective;
(2)of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for any additional information regarding Huatai and/or any Transferee; and
(3)of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Shares for sale under the applicable securities or blue sky laws of any jurisdiction.
For the avoidance of doubt, the provisions of clauses (vii), (viii), (xii) and (xiii) of this Section 6(a) shall apply only in respect of an underwritten offering and only if (based on market prices at the time the offering is requested by Huatai and/or any Transferee) the number of Registrable Shares to be sold in the offering would reasonably be expected to yield gross proceeds to the Requesting Holders of at least the Minimum Amount.
(b)At all times after the Company has filed a registration statement with the SEC pursuant to the requirements of the Securities Act that covers any Registrable Shares and until the Termination Date, the Company shall use reasonable best efforts to continuously maintain in effect the registration statement of Common Stock under Section 12 of the Exchange Act and to use reasonable best efforts to file all reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder, all to the extent required to enable the Holders to be eligible to sell Registrable Shares (if any) pursuant to Rule 144 under the Securities Act.
(c)The Company may require, and each Holder agrees to provide, information regarding the Holders and any distributor of the Registrable Shares and the distribution of such securities as the Company may from time to time reasonably request. Notwithstanding anything to the contrary in this Agreement, the Company shall not be required to file a Registration Statement or include Registrable Shares in a Registration Statement unless it has received from the Registering Holders, at least five days prior to the anticipated filing date of the Registration Statement, requested information required to be provided by Huatai and/or any Transferee for inclusion therein.
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(d)The Company may prepare and deliver an issuer free-writing prospectus (as such term is defined in Rule 405 under the Securities Act) in lieu of any supplement to a prospectus, and references herein to any “supplement” to a Prospectus shall include any such issuer free-writing prospectus. No Holder or any other seller of Registrable Shares may use a free-writing prospectus to offer or sell any such shares without the Company’s prior written consent.
(e)It is understood and agreed that any failure of the Company to file a Registration Statement or any amendment or supplement thereto or to cause any such document to become or remain effective or usable within or for any particular period of time as provided in this Agreement, due to reasons that are not reasonably within its control, or due to any refusal of the SEC to permit a registration statement or prospectus to become or remain effective or to be used because of unresolved SEC comments thereon (or on any documents incorporated therein by reference) despite the Company’s good faith and reasonable best efforts to resolve those comments, shall not be a breach of this Agreement.
(f)It is further understood and agreed that the Company shall not have any obligations under this Section 6 at any time on or after the Termination Date, unless an underwritten offering in which a Holder participates has been priced but not closed prior to the Termination Date, in which event the Company’s obligations hereunder shall continue with respect to such offering until it is so closed (but not more than 60 days after the commencement of the offering).
Section 7.Registration Expenses.
(a)Subject to the next sentence, all expenses incident to the Company’s performance of or compliance with this Agreement, including all registration and filing fees; fees and expenses of compliance with securities or “blue sky” laws; FINRA fees; listing application fees; expenses in connection with the preparation and printing of any Registration Statements, Prospectuses and other documents in connection therewith and any amendments or supplements thereto; cost of distributing Prospectuses in preliminary and final form as well as any supplements thereto; transfer agent’s and registrar’s fees; and fees and disbursements of counsel for the Company and all independent certified public accountants and other Persons retained by the Company (all such expenses being herein referred to as “Registration Expenses”) (but not including any underwriting discounts or commissions attributable to the sale of Registrable Shares or fees and expenses of counsel and any other advisor representing any underwriters or other distributors), shall be borne by the Company. The Registering Holders shall bear all underwriting discounts and commissions associated with any sale of Registrable Shares and shall pay all of their costs and expenses, including all fees and expenses of any counsel (and any other advisers) representing the Holders and any expenses in connection with the Stock Exchange of Hong Kong Limited, the Shanghai Stock Exchange or the China Securities Regulatory Commission as well as any stock transfer taxes.
(b)The obligation of the Company to bear the expenses described in Section 7(a) shall apply irrespective of whether a registration, once properly demanded or requested, becomes effective or is withdrawn or suspended; provided, however, that Registration Expenses for any Registration Statement withdrawn solely at the request of a Holder (unless withdrawn following commencement of a Suspension Period pursuant to Section 2(c)(iv)) shall be borne by the Holders.
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(a)The Company shall indemnify, to the fullest extent permitted by law, each Holder and each Person who controls a Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities, judgments, costs (including reasonable costs of investigation) and expenses (including reasonable attorneys’ fees) (“Damages”) arising out of or based upon any untrue or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus relating to the Registrable Shares or any amendment thereof or supplement thereto or arising out of or based upon any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such Damages arise out of or are based upon information furnished to the Company by or on behalf of a Holder expressly for use therein. In connection with an underwritten offering in which a Holder participates conducted pursuant to a registration effected hereunder, the Company shall indemnify each participating underwriter and each Person who controls such underwriter (within the meaning of the Securities Act) to the same extent as provided in this Section 8(a) with respect to the indemnification of the Holders, mutatis mutandis.
(b)Each Holder holding Registrable Shares included in any Registration Statement shall jointly and severally indemnify, to the fullest extent permitted by law, the Company, its officers and directors and each Person (other than Holders) who controls the Company (within the meaning of the Securities Act) against all Damages arising out of or based upon any untrue or alleged untrue statement of material fact contained in such Registration Statement or related Prospectus, or any amendment or supplement thereto, or any preliminary or free writing prospectus, or arising out of or based upon any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only insofar as such Damages arise out of or are based upon information furnished to the Company by or on behalf of a Holder expressly for use therein. In connection with an underwritten offering in which a Holder participates conducted pursuant to a registration effected hereunder, each Holder holding Registrable Shares included in any Registration Statement shall jointly and severally indemnify each participating underwriter and each Person who controls such underwriter (within the meaning of the Securities Act) to the same extent as provided in this Section 8(b) with respect to the Holders’ indemnification of the Company. No Holder shall be liable under this Section 8(b) for any Damages in excess of the aggregate net proceeds realized by the Holders in the sale of Registrable Shares to which such Damages relate.
(c)Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying Person of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying Person to assume the defense of such claim with counsel reasonably satisfactory to the indemnified Person. Failure so to notify the indemnifying Person shall not relieve the indemnifying Person from any liability that it may have to an indemnified Person except to the extent that the indemnifying Person is materially and adversely prejudiced thereby. The indemnifying Person shall not be subject to any liability for any settlement made by the indemnified Person without its consent (but such consent may not be unreasonably withheld). An indemnifying Person who is entitled to, and elects to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel (in addition to one local counsel, if applicable) for all Persons indemnified (hereunder or otherwise) by such indemnifying Person with respect to such claim (and all other claims arising out of the same circumstances),
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unless in the reasonable judgment of any indemnified Person there may be one or more legal or equitable defenses available to such indemnified Person which are in addition to or may conflict with those available to another indemnified Person with respect to such claim, in which case such maximum number of counsel for all indemnified Persons shall be two rather than one. If an indemnifying Person is entitled to, and elects to, assume the defense of a claim, the indemnified Person shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but, except as set forth above, the indemnifying Person shall not be obligated to reimburse the indemnified Person for the costs thereof. The indemnifying Person shall not consent to the entry of any judgment or enter into or agree to any settlement relating to a claim or action for which any indemnified Person would be entitled to indemnification by any indemnified Person hereunder unless such judgment or settlement imposes no ongoing obligations on any such indemnified Person and includes as an unconditional term the giving, by all relevant claimants and plaintiffs to such indemnified Person, a release, satisfactory in form and substance to such indemnified Person, from all liabilities in respect of such claim or action for which such indemnified Person would be entitled to such indemnification. The indemnifying Person shall not be liable hereunder for any amount paid or payable or incurred pursuant to or in connection with any judgment entered or settlement effected with the consent of an indemnified Person unless the indemnifying Person has also consented to such judgment or settlement.
(d)The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified Person or any officer, director or controlling Person of such indemnified Person and shall survive the transfer of Registrable Shares and the Termination Date but only with respect to offers and sales of Registrable Shares made before the Termination Date or during the period following the Termination Date referred to in Section 6(f).
(e)If the indemnification provided for in or pursuant to this Section 8 is due in accordance with the terms hereof, but is held by a court to be unavailable or unenforceable in respect of any losses, claims, Damages, liabilities or expenses referred to herein, then each applicable indemnifying Person, in lieu of indemnifying such indemnified Person, shall contribute to the amount paid or payable by such indemnified Person as a result of such losses, claims, Damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying Person on the one hand and of the indemnified Person on the other in connection with the statements or omissions which result in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative fault of the indemnifying Person on the one hand and of the indemnified Person on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying Person or by the indemnified Person, and by such Person’s relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. In no event shall the liability of the indemnifying Person be greater in amount than the amount for which such indemnifying Person would have been obligated to pay by way of indemnification if the indemnification provided for under Section 8(a) or Section 8(b) hereof had been available under the circumstances.
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Section 9.Securities Act Restrictions.
The Registrable Shares are restricted securities under the Securities Act and may not be offered or sold except pursuant to an effective registration statement or an available exemption from registration under the Securities Act. Accordingly, Huatai and any Transferee shall not, directly or through others, offer or sell any Registrable Shares except pursuant to a Registration Statement as contemplated herein or pursuant to Rule 144 or another exemption from registration under the Securities Act, if available. Prior to any transfer of Registrable Shares other than pursuant to an effective registration statement, Huatai or a Transferee, as applicable, shall notify the Company of such transfer and the Company may require Huatai or the Transferee, as applicable, to provide, prior to such transfer, such evidence that the transfer will comply with the Securities Act (including written representations or an opinion of counsel) as the Company may reasonably request. The Company may impose stop-transfer instructions with respect to any Registrable Shares that are to be transferred in contravention of this Agreement. Any certificates representing the Registrable Shares may bear a legend (and the Company’s share registry may bear a notation) referencing the restrictions on transfer contained in this Agreement until such time as such securities have ceased to be (or are to be transferred in a manner that results in their ceasing to be) Registrable Shares. Subject to the provisions of this Section 9, the Company will replace any such legended certificates with unlegended certificates promptly upon surrender of the legended certificates to the Company or its designee, to facilitate a lawful transfer or at any time after such shares cease to be Registrable Shares.
Section 10.Transfers of Rights.
(a) None of the rights of Huatai under this Agreement shall be transferrable to any other Person except for Permitted Transferees. If Huatai transfers any rights under this Agreement to a Permitted Transferee, such Permitted Transferee shall, together with all other such Permitted Transferees and Huatai (to the extent Huatai continues to hold Registrable Shares), have the rights of Huatai under this Agreement, but only if the Permitted Transferee signs and delivers to the Company a written acknowledgment (in form and substance satisfactory to the Company) that it has joined with Huatai and the other Permitted Transferees as a party to this Agreement and has assumed the rights and obligations of Huatai hereunder with respect to the rights transferred to it by Huatai. Each such transfer shall be effective when (but only when) the Permitted Transferee has signed and delivered such written acknowledgment to the Company. Upon any such effective transfer, the Permitted Transferee shall automatically have the rights and obligations so transferred, and Huatai’s obligations under this Agreement and the rights not so transferred shall continue. Notwithstanding any other provision of this Agreement, no Person who acquires securities transferred in violation of this Agreement or who acquires securities that are not or upon acquisition cease to be Registrable Shares (including any securities acquired in an underwritten offering or pursuant to Rule 144), shall have any rights under this Agreement with respect to such securities, and such securities shall not have the benefits afforded hereunder to Registrable Shares.
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(a)Notices. Any notice or communication to the Company or Huatai and/or any Transferee by the other shall be duly given if sent by facsimile or in writing and delivered in person or mailed by first-class mail, postage prepaid, addressed as follows:
If to the Company:
AssetMark Financial Holdings, Inc.
1655 Grant Street, 10th Floor
Concord, California 94520
Attention: Ted Angus, General Counsel
E-mail: ted.angus@assetmark.com
Telephone: (925) 521-2237
If to any Holder:
Huatai International Investment Holdings Limited
Unit 5801-05, 58/F, The Center, 99 Queen’s Road Central
Hong Kong
Attention: Gene Liu, Business Development
E-mail: geneliu.htsc.com
Telephone: (+852) 3658 6109
The Company, on the one hand, and the Holders, on the other hand, may by notice to the other designate additional or different addresses for subsequent notices or communications.
(b)No Waivers. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
(c)Assignment. Neither this Agreement nor any right, remedy, obligation nor liability arising hereunder or by reason hereof shall be assignable by any party hereto without the prior written consent of the other parties, and any attempt to assign any right, remedy, obligation or liability hereunder without such consent shall be void, except (i) an assignment, in the case of a merger or consolidation where such party is not the surviving entity, or a sale of substantially all of its assets, to the entity which is the survivor of such merger or consolidation or the purchaser in such sale or (ii) an assignment by Huatai to a Permitted Transferee in accordance with the terms hereof.
(d)No Third-Party Beneficiaries. Nothing contained in this Agreement, expressed or implied, is intended to confer upon any person or entity other than the Company and Huatai (and any Transferee), any benefits, rights, or remedies (except as specified in Section 8 hereof).
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(e)Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. Each of the parties hereto agrees (a) to submit to the non-exclusive personal jurisdiction of the State or Federal courts in the Borough of Manhattan, The City of New York, (b) that non-exclusive jurisdiction and venue shall lie in the State or Federal courts in the State of New York, and (c) that notice may be served upon such party at the address and in the manner set forth for such party in Section 11(a). To the extent permitted by applicable law, each of the parties hereto hereby unconditionally waives trial by jury in any legal action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
(f)Counterparts. This Agreement may be executed in any number of counterparts (including by e-mail, PDF or facsimile) and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument.
(g)Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes and replaces all other prior agreements, written or oral, among the parties hereto with respect to the subject matter hereof.
(h)Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner such that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.
(i)Amendments. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the prior written consent of the Company and Huatai.
[Signature Pages Follow]
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IN WITNESS WHEREOF, this Agreement has been duly executed by each of the parties hereto as of the date first written above.
ASSETMARK FINANCIAL HOLDINGS, INC. |
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EVP, General Counsel |
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HUATAI INTERNATIONAL INVESTMENT HOLDINGS LIMITED |
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[Signature Page to Registration Rights Agreement]
IN WITNESS WHEREOF, this Agreement has been duly executed by each of the parties hereto as of the date first written above.
ASSETMARK FINANCIAL HOLDINGS, INC. |
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HUATAI INTERNATIONAL INVESTMENT HOLDINGS LIMITED |
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/s/ Yi Zhou |
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Yi Zhou |
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Authorized Signatory |
[Signature Page to Registration Rights Agreement]
Exhibit 21.1
Subsidiaries of the Registrant
Legal Name of Entity |
Jurisdiction of Org |
AssetMark Financial, Inc. |
Arizona |
AssetMark, Inc. |
California |
AssetMark Trust Company |
Arizona |
AssetMark Retirement Services, Inc. |
Pennsylvania |
AssetMark Brokerage, LLC |
Delaware |
Global Financial Private Capital, Inc. |
Florida |
Global Financial Advisory, LLC |
Delaware |
WBI OBS Financial, LLC |
Ohio |
OBS Financial, Inc. |
Ohio |
OBS Financial Services, Inc. |
Delaware |
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Charles Goldman, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2020 of AssetMark Financial Holdings, Inc. (the “Company”); |
2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report; |
4. |
The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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(b) |
[Paragraph omitted pursuant to SEC Release Nos. 33‑8760]; and |
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(d) |
Disclosed in this quarterly report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and |
5. |
The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting. |
Date: May 13, 2020 |
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By: |
/s/ Charles Goldman |
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Charles Goldman |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary Zyla, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q for the quarter ended March 31, 2020 of AssetMark Financial Holdings, Inc. (the “Company”); |
2. |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. |
The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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(b) |
[Paragraph omitted pursuant to SEC Release Nos. 33‑8760]; |
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(c) |
Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and |
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(d) |
Disclosed in this quarterly report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and |
5. |
The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s Board of Directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 13, 2020 |
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By: |
/s/ Gary Zyla |
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Gary Zyla |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AssetMark Financial Holdings, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
Date: May 13, 2020 |
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By: |
/s/ Charles Goldman |
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Charles Goldman |
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Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of AssetMark Financial Holdings, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
Date: May 13, 2020 |
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By: |
/s/ Gary Zyla |
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Gary Zyla |
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Chief Financial Officer |