AssetMark(AMK) - 2020 Q4 - Annual Report

PART I Business AssetMark offers wealth management and technology solutions to independent financial advisers, with asset-based revenue and platform assets growing to $75 billion by 2020 - AssetMark's platform assets grew at a 21% compounded annual growth rate from $29 billion at the end of 2015 to $75 billion at the end of 2020[14] - As of December 31, 2020, the platform served over 186,000 investor households through approximately 8,400 adviser relationships[14] FY 2020 Financial Highlights | Metric | Value (USD) | | :--- | :--- | | Total Revenue | $432.1 million | | Net Loss | $7.8 million | | Adjusted EBITDA | $115.0 million | | Adjusted Net Income | $73.2 million | - The company's revenue model is highly recurring, with 99% of 2020 revenue being recurring; asset-based revenue constituted 95% of total revenue, while spread-based revenue accounted for 4%[30] - As of December 31, 2020, the company had 732 employees; the workforce is 57% male and 43% female, with 66% identifying as white and 19% as underrepresented minorities[38] Risk Factors The company faces risks from market volatility, competition, data security, regulatory oversight, and the influence of its PRC-based controlling stockholder Risks Related to Our Business and Operations Business operations face risks from market volatility, interest rate changes, competitive pressure, system failures, acquisition integration, and third-party dependencies - Asset-based revenue, which is sensitive to market fluctuations, constituted 95% of total revenue for the year ended December 31, 2020[51] - Spread-based revenue is directly correlated with changes in interest rates, which declined significantly in 2020, remaining near zero in Q4[52] - The company faces risks related to integrating acquisitions, including the recent acquisitions of GFPC and OBS, which could divert management attention and incur unanticipated costs[57] Risks Related to Intellectual Property, Data Privacy and Cybersecurity Significant data and cybersecurity risks, including breaches and evolving privacy laws, pose litigation, reputational, and compliance challenges - The company stores extensive personal investment and financial information, making it a target for cyber-attacks and creating liability risk from potential data breaches[89][90] - The company is subject to evolving data privacy laws like the CCPA and the newly approved CPRA, which increase compliance costs and create a private right of action for certain data breaches[101] Risks Related to Our Controlling Stockholder's Ultimate Parent Being a PRC Company The controlling stockholder's PRC affiliation may influence business decisions and subject future acquisitions to CFIUS review - The controlling stockholder, HTSC, is subject to PRC laws that may require approval from PRC regulators for certain corporate actions undertaken by AssetMark, such as specific debt issuances or investments[110][112] - As a "foreign person" under U.S. law due to its ownership, the company's future acquisitions or investments may be subject to review by the Committee on Foreign Investment in the United States (CFIUS), which could block, delay, or impose conditions on such transactions[117] Risks Related to Regulation and Litigation Operating in a highly regulated industry, the company faces risks from non-compliance, new regulations, litigation, and investigations - The company's subsidiaries are registered as investment advisers with the SEC, a commodity pool operator with the CFTC, and a broker-dealer with FINRA, subjecting them to extensive and specific regulatory schemes[120][121][122] - New regulations, such as the SEC's Regulation Best Interest (Reg BI) which became effective in June 2020, could cause broker-dealers to re-evaluate their business models, potentially affecting their use of AssetMark's services[125] Risks Related to Ownership of Our Common Stock HTSC's 70.2% ownership creates a "controlled company" status, impacting governance and potentially stockholder interests - As of December 31, 2020, HTSC owned approximately 70.2% of outstanding common stock, giving it effective control over matters requiring stockholder approval[134] - The company qualifies as a "controlled company" under NYSE listing standards, allowing it to rely on exemptions from certain corporate governance requirements, such as having a majority of independent directors[144] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[157] Properties Headquarters are in Concord, California, with additional leased office spaces totaling 96,944 square feet and 65,729 square feet respectively - The company's headquarters are in Concord, California, consisting of approximately 96,944 square feet of leased space[157] Legal Proceedings The company is cooperating with SEC inquiries regarding potential conflicts of interest, following an examination report and subpoenas in July 2020 - In July 2020, two subsidiaries received subpoenas from the SEC's Division of Enforcement related to the disclosure of potential conflicts of interest; the company is cooperating with this non-public, fact-finding inquiry[158] Mine Safety Disclosures This item is not applicable to the company - Not applicable[159] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock is listed on NYSE under "AMK" since July 2019, with no anticipated dividends as earnings are retained for operations - The company's common stock is listed on the NYSE under the symbol "AMK" since July 18, 2019[161] - The company does not anticipate paying dividends on its common stock in the foreseeable future, intending to retain funds for business operations[163] Selected Consolidated Financial Data Consolidated financial data shows total revenue growth to $432.1 million in 2020, with a net loss of $7.8 million and total assets of $1.22 billion Selected Consolidated Financial Data (in thousands USD) | Metric | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $432,079 | $417,936 | $363,634 | $295,517 | | Total Operating Expenses | $424,573 | $388,466 | $307,151 | $276,174 | | Net Income (Loss) | ($7,812) | ($420) | $37,426 | $98,978 | | Net Income (Loss) per Share | ($0.12) | ($0.01) | $0.57 | $1.50 | | Total Assets | $1,223,588 | $1,188,960 | $1,147,275 | $1,097,741 | | Total Stockholders' Equity | $905,073 | $858,861 | $699,011 | $885,958 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 2020 financial performance, noting 3.4% revenue growth to $432.1 million, a $7.8 million net loss, and 21% platform asset growth to $74.5 billion Business and Financial Highlights 2020 highlights include OBS acquisition, a new $250 million credit facility, $432.1 million revenue, and $7.8 million net loss - Completed the acquisition of OBS on February 29, 2020, adding approximately $2.1 billion in platform assets[176] - Entered into a new $250 million revolving credit facility on December 30, 2020, and used a $75 million drawdown to retire $124 million of previous outstanding debt[176] 2020 vs 2019 Financial Highlights (USD) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $432.1M | $417.9M | | Net Loss | ($7.8M) | ($0.4M) | | Adjusted EBITDA | $115.0M | $109.9M | | Platform Assets (Year-End) | $74.5B | $61.6B | Key Operating Metrics Key operating metrics show platform assets at $74.5 billion, net flows of $5.5 billion, and Adjusted EBITDA of $115.0 million in 2020 Platform Asset Movement (in millions USD) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Beginning Platform Assets | $61,608 | $44,855 | $42,385 | | Net Flows | $5,483 | $5,389 | $5,916 | | Market Impact net of fees | $5,369 | $7,575 | ($3,446) | | Acquisition Impact | $2,060 | $3,789 | — | | Ending Platform Assets | $74,520 | $61,608 | $44,855 | Adviser and Household Metrics (at period-end) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Advisers | 8,454 | 7,958 | 7,573 | | Engaged Advisers | 2,536 | 2,230 | 1,837 | | Households | 186,602 | 162,225 | 133,947 | Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands USD) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Income (Loss) | ($7,812) | ($420) | $37,426 | | Adjustments (Taxes, Interest, D&A) | $48,858 | $57,440 | $42,728 | | EBITDA | $40,046 | $55,020 | $80,154 | | Share-based compensation | $53,837 | $36,202 | $6,568 | | Acquisition expenses | $12,558 | $11,392 | — | | Other Adjustments | $8,606 | $6,974 | $2,223 | | Adjusted EBITDA | $115,047 | $109,888 | $88,945 | Results of Operations Total revenue grew 3.4% to $432.1 million in 2020, but a 52.0% drop in spread-based revenue and higher expenses led to a $7.8 million net loss Results of Operations: 2020 vs 2019 (in thousands USD) | Metric | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $432,079 | $417,936 | $14,143 | 3.4% | | Asset-based revenue | $412,023 | $377,718 | $34,305 | 9.1% | | Spread-based revenue | $16,618 | $34,586 | ($17,968) | (52.0)% | | Total Operating Expenses | $424,573 | $388,466 | $36,107 | 9.3% | | Employee compensation | $176,483 | $154,999 | $21,484 | 13.9% | | Net Income (Loss) | ($7,812) | ($420) | ($7,392) | 1,760.0% | - The decrease in spread-based revenue in 2020 was due to lower interest rates, while the increase in employee compensation was primarily due to a $17.6 million rise in share-based compensation expense[238][243] Results of Operations: 2019 vs 2018 (in thousands USD) | Metric | 2019 | 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $417,936 | $363,634 | $54,302 | 14.9% | | Total Operating Expenses | $388,466 | $307,151 | $81,315 | 26.5% | | Net Income (Loss) | ($420) | $37,426 | ($37,846) | (101.1)% | Liquidity and Capital Resources Operations are financed by cash flow, with $70.6 million cash, a new $250 million credit facility, and $76.9 million operating cash flow in 2020 - On December 30, 2020, the company entered into a new $250 million revolving credit facility and repaid its prior Term Loan in full[276][280] Cash Flow Summary (in thousands USD) | Cash Flow Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $76,947 | $55,083 | $61,662 | | Net cash used in investing activities | ($49,970) | ($59,914) | ($17,714) | | Net cash (used in) provided by financing activities | ($50,699) | ($2,182) | $11,259 | Quantitative and Qualitative Disclosures About Market Risk Market risk is primarily asset-based, with a 1% platform asset decrease impacting pre-tax income by $2.9 million, and interest rate changes by $26 million - A 1% decrease in the aggregate value of platform assets at the beginning of 2020 would have caused pre-tax income to decline by approximately $2.9 million[304] - A 100 basis point change in short-term interest rates would result in an approximate $26 million annual change in income before taxes, based on client cash assets at ATC as of December 31, 2020[305] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2018-2020, including balance sheets, income statements, and detailed notes on key accounts and events Consolidated Balance Sheets Total assets reached $1.22 billion in 2020, with liabilities decreasing to $318.5 million and equity increasing to $905.1 million Consolidated Balance Sheet Highlights (in thousands USD) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $70,619 | $96,341 | | Goodwill | $338,848 | $327,310 | | Other intangible assets, net | $655,736 | $651,915 | | Total Assets | $1,223,588 | $1,188,960 | | Long-term debt, net | $75,000 | $121,692 | | Total Liabilities | $318,515 | $330,099 | | Total Stockholders' Equity | $905,073 | $858,861 | Consolidated Statements of Income and Comprehensive Income In 2020, total revenue was $432.1 million, with a net loss of $7.8 million and diluted loss per share of $0.12 Consolidated Income Statement (in thousands USD) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenue | $432,079 | $417,936 | $363,634 | | Total Operating Expenses | $424,573 | $388,466 | $307,151 | | Income Before Income Taxes | $231 | $14,905 | $54,563 | | Net Income (Loss) | ($7,812) | ($420) | $37,426 | | Diluted Net Income (Loss) Per Share | ($0.12) | ($0.01) | $0.57 | Notes to Consolidated Financial Statements Notes detail OBS acquisition, a $250 million credit facility, share-based compensation, and the $145 million Voyant acquisition - On February 29, 2020, the company acquired WBI OBS Financial, Inc. for a final purchase price of $21.3 million, recording goodwill of $11.5 million[395] - As of December 31, 2020, total unrecognized compensation cost related to unvested RSAs, stock options, RSUs, and SARs was $41.8 million, $3.6 million, $8.2 million, and $7.9 million, respectively[450][455][458][463] - Subsequent to year-end, on March 1, 2021, the company entered into an agreement to acquire Voyant, Inc. for approximately $145 million, to be paid in a mix of cash and common stock[475] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on financial disclosure - None[478] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[478] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[479] Other Information This item is not applicable - Not applicable[482] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Certain Relationships Information for Items 10-14, covering governance, compensation, and ownership, is incorporated by reference from the 2021 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's Proxy Statement for the 2021 Annual Meeting of Stockholders[484][485][486][487][488] PART IV Exhibits and Financial Statement Schedules This section lists financial statements from Item 8 and an index of all exhibits, with financial statement schedules omitted - The financial statements required by this item are incorporated by reference from Item 8 of the report[490] - All financial statement schedules have been omitted because the required information is not applicable or is included in the consolidated financial statements[491] Form 10-K Summary This item is not applicable - Not applicable[492]