AssetMark(AMK) - 2021 Q1 - Quarterly Report

Form 10-Q Filing Information This document is a Quarterly Report on Form 10-Q for AssetMark Financial Holdings, Inc. for Q1 2021, identifying the registrant as an accelerated filer and emerging growth company - The document is a Quarterly Report on Form 10-Q for AssetMark Financial Holdings, Inc. for the quarterly period ended March 31, 2021[2] - The registrant is an accelerated filer and an emerging growth company[3] Common Stock and Exchange Information | Metric | Value | | :--- | :--- | | Common stock par value | $0.001 per share | | Trading symbol | AMK | | Exchange | New York Stock Exchange | | Commission File Number | 001-38980 | | Shares outstanding (as of April 30, 2021) | 72,459,255 | Special Note Regarding Forward-Looking Statements This report contains forward-looking statements subject to risks, uncertainties, and assumptions, with actual results potentially differing materially due to various factors - This report contains forward-looking statements subject to risks, uncertainties, and assumptions, including projections of future financial performance, growth strategies, industry outlook, and the impacts of the COVID-19 pandemic[8] - Actual results may differ materially from these statements due to factors discussed in the 'Risk Factors' section, and the company is not obligated to update these statements[8] Summary of Risk Factors The company's business is exposed to numerous risks, including revenue fluctuations, intense competition, reliance on financial advisers, and market conditions - The company's business is exposed to numerous risks, including revenue fluctuations, intense industry competition, reliance on the financial advisory industry, potential fee negotiations, investor withdrawals, and changes in market and economic conditions (including the COVID-19 pandemic)[10][11] - Other significant risks include liability for fiduciary duty breaches, data and cybersecurity risks, influence from its PRC-regulated controlling stockholder, extensive government regulation, and potential conflicts of interest[11][12] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents AssetMark Financial Holdings, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flow statements, with notes on organization and accounting policies Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | ASSETS | March 31, 2021 (unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Current assets: | | | | Cash and cash equivalents | $75,831 | $70,619 | | Restricted cash | 11,000 | 11,000 | | Investments, at fair value | 12,263 | 10,577 | | Fees and other receivables, net | 8,459 | 8,891 | | Income tax receivable, net | 17,178 | 8,596 | | Prepaid expenses and other current assets | 13,088 | 13,637 | | Total current assets | 137,819 | 123,320 | | Property, plant and equipment, net | 8,187 | 7,388 | | Capitalized software, net | 69,392 | 68,835 | | Other intangible assets, net | 654,286 | 655,736 | | Operating lease right-of-use assets | 24,512 | 27,496 | | Goodwill | 338,848 | 338,848 | | Other assets | 2,294 | 1,965 | | Total assets | $1,235,338 | $1,223,588 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current liabilities: | | | | Accounts payable | $1,434 | $2,199 | | Accrued liabilities and other current liabilities | 32,602 | 43,694 | | Total current liabilities | 34,036 | 45,893 | | Long-term debt, net | 75,000 | 75,000 | | Other long-term liabilities | 17,241 | 16,302 | | Long-term portion of operating lease liabilities | 29,976 | 31,820 | | Deferred income tax liabilities, net | 149,500 | 149,500 | | Total long-term liabilities | 271,717 | 272,622 | | Total liabilities | 305,753 | 318,515 | | Commitments and contingencies | — | — | | Stockholders' equity: | | | | Common stock, $0.001 par value | 72 | 72 | | Additional paid-in capital | 883,858 | 850,430 | | Retained earnings | 45,655 | 54,571 | | Total stockholders' equity | 929,585 | 905,073 | | Total liabilities and stockholders' equity | $1,235,338 | $1,223,588 | Condensed Consolidated Statements of Comprehensive Income Unaudited Condensed Consolidated Statements of Comprehensive Income (in thousands except share and per share data) | Revenue: | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Asset-based revenue | $115,813 | $105,650 | | Spread-based revenue | 2,606 | 7,951 | | Other revenue | 587 | 1,289 | | Total revenue | 119,006 | 114,890 | | Operating expenses: | | | | Asset-based expenses | 36,094 | 35,015 | | Spread-based expenses | 676 | 1,289 | | Employee compensation | 67,302 | 43,497 | | General and operating expenses | 17,489 | 19,365 | | Professional fees | 4,260 | 3,831 | | Depreciation and amortization | 9,471 | 8,409 | | Total operating expenses | 135,292 | 111,406 | | Interest expense | 771 | 1,627 | | Other expense, net | (15) | 50 | | Income (loss) before income taxes | (17,042) | 1,807 | | Provision benefit from income taxes | (8,126) | (929) | | Net income (loss) | (8,916) | 2,736 | | Net comprehensive income (loss) | $(8,916) | $2,736 | | Net income (loss) per share attributable to common stockholders: | | | | Basic | (0.13) | 0.04 | | Diluted | (0.13) | 0.04 | | Weighted average number of common shares outstanding, basic | 70,422,306 | 67,142,459 | | Weighted average number of common shares outstanding, diluted | 70,422,306 | 69,317,261 | Condensed Consolidated Statements of Stockholders' Equity Unaudited Condensed Consolidated Statements of Stockholders' Equity (in thousands except share data) | | Common Shares | Common stock Amount | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total stockholders' equity | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Balance at December 31, 2019 | 72,390,080 | $72 | $796,406 | $62,383 | $— | $858,861 | | Net income | — | — | — | 2,736 | — | 2,736 | | Share-based employee compensation | — | — | 13,188 | — | — | 13,188 | | Balance at March 31, 2020 | 72,390,080 | $72 | $809,594 | $65,119 | $— | $874,785 | | Balance at December 31, 2020 | 72,459,255 | $72 | $850,430 | $54,571 | $— | $905,073 | | Net loss | — | — | — | (8,916) | — | (8,916) | | Share-based employee compensation | — | — | 33,428 | — | — | 33,428 | | Balance at March 31, 2021 | 72,459,255 | $72 | $883,858 | $45,655 | $— | $929,585 | Condensed Consolidated Statements of Cash Flows Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | CASH FLOWS FROM OPERATING ACTIVITIES | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net income (loss) | $(8,916) | $2,736 | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | Depreciation and amortization | 9,471 | 8,409 | | Interest | 190 | 78 | | Deferred income taxes | — | 522 | | Share-based compensation | 33,428 | 13,188 | | Changes in certain assets and liabilities: | | | | Fees and other receivables, net | (710) | (1,835) | | Prepaid expenses and other current assets | 804 | 944 | | Accounts payable, accrued liabilities and other current liabilities | (11,028) | (12,909) | | Income tax receivable, net | (8,582) | (1,884) | | Net cash provided by operating activities | 14,657 | 9,249 | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | Purchase of WBI OBS Financial, LLC, net of cash received | — | (18,404) | | Purchase of investments | (1,363) | (1,014) | | Sale of investments | 151 | — | | Purchase of property and equipment | (231) | (416) | | Purchase of computer software | (8,002) | (6,095) | | Net cash used in investing activities | (9,445) | (25,929) | | Net change in cash, cash equivalents, and restricted cash | 5,212 | (16,680) | | Cash, cash equivalents, and restricted cash at beginning of period | 81,619 | 105,341 | | Cash, cash equivalents, and restricted cash at end of period | $86,831 | $88,661 | | SUPPLEMENTAL CASH FLOW INFORMATION | | | | Income taxes paid | $464 | $365 | | Interest paid | $577 | $1,547 | | Non-cash operating activities: | | | | Non-cash changes to right-of-use assets | $(2,263) | $38,495 | | Non-cash changes to lease liabilities | $(2,263) | $39,839 | Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Organization and Nature of Business AssetMark Financial Holdings, Inc. and its subsidiaries provide wealth management solutions to individual investors through financial advisers, offering an open-architecture product platform, tailored client advice, asset allocation, practice management, support services, and technology - The Company offers wealth management solutions to individual investors via financial advisers, including an open-architecture product platform, client advice, asset allocation, practice management, and technology[27] - Key subsidiaries include AssetMark Trust Company (custodial services), AssetMark, Inc. (investment adviser to proprietary funds), AssetMark Retirement Services, Inc. (401(k)/403(b) record-keeper), and AssetMark Brokerage, LLC (mutual fund distribution)[28][29][30] - The company is in the process of acquiring Voyant Inc. and recently merged OBS Financial Services into AssetMark, Inc[31][32] Note 2. Summary of Significant Accounting Policies The financial statements are prepared in accordance with GAAP for interim reporting, with management's opinion that all necessary adjustments are included; the COVID-19 pandemic is expected to impact revenue, and the company adopted ASU 2019-12 with no significant impact - Unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim reporting, with all necessary normal recurring adjustments included[33] - The COVID-19 pandemic is expected to impact asset- and spread-based revenue, but the duration and extent of the impact on operations, financial condition, or liquidity for future periods cannot be predicted with certainty[36] - The company adopted ASU 2019-12 (Income Taxes) on January 1, 2021, with no significant impact, and is evaluating ASU 2020-04 (Reference Rate Reform)[38][39] Note 3. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets totaled $13.088 million as of March 31, 2021, a slight decrease from $13.637 million at December 31, 2020 Prepaid Expenses and Other Current Assets (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Prepaid expenses | $7,671 | $8,182 | | Right-of-use leases | 3,828 | 4,117 | | Other | 1,589 | 1,338 | | Total | $13,088 | $13,637 | Note 4. Acquisition of Voyant Inc. On March 1, 2021, the Company agreed to acquire Voyant Inc., a financial planning and client digital engagement solutions provider, for approximately $145 million, payable in cash and unregistered common stock, subject to regulatory approval - On March 1, 2021, the Company entered an agreement to acquire Voyant Inc. for approximately $145 million[42] - The purchase price will be paid in a mix of cash and 994,036 unregistered shares of common stock (approx. $25 million value) to Voyant's founders, subject to an 18-month lock-up period[42] - The acquisition is subject to customary terms and conditions, including regulatory approval[42] Note 5. Goodwill and Intangible Assets Goodwill remained stable at $338.848 million as of March 31, 2021, with no impairment, while definite-lived intangible assets totaled $654.286 million with a 14.7-year weighted-average useful life - Goodwill balance remained at $338,848 thousand as of March 31, 2021, with no impairment identified after qualitative testing related to COVID-19[45] Intangible Assets (in thousands) | Category | March 31, 2021 Net Carrying Amount | December 31, 2020 Net Carrying Amount | Estimated Remaining Useful Life (March 31, 2021) | | :--- | :--- | :--- | :--- | | Indefinite-lived: Broker-dealer relationships | $570,480 | $570,480 | N/A | | Definite-lived: Trade names | 35,709 | 36,282 | 16 years | | Definite-lived: Broker-dealer license | 8,999 | 9,144 | 16 years | | Definite-lived: ATC regulatory status | 18,155 | 18,446 | 16 years | | Definite-lived: GFPC adviser relationships | 12,257 | 12,511 | 12 years | | Definite-lived: OBS adviser and trust relationships | 8,686 | 8,873 | 11 years | | Total | $654,286 | $655,736 | 14.7 years (weighted average) | - Amortization expense for definite-lived intangible assets was $1,450 thousand for the three months ended March 31, 2021, up from $1,326 thousand in the prior year[47] Note 6. Accrued Liabilities and Other Current Liabilities Accrued liabilities and other current liabilities decreased to $32.602 million as of March 31, 2021, from $43.694 million at December 31, 2020, primarily due to reductions in accrued bonus and compensation and benefits payable Accrued Liabilities and Other Current Liabilities (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Accrued bonus | $7,329 | $15,336 | | Compensation and benefits payable | 3,299 | 10,423 | | Current portion of operating lease liability | 2,674 | 4,095 | | Asset-based payables | 1,356 | 1,339 | | Other accrued expenses | 17,944 | 12,501 | | Total | $32,602 | $43,694 | Note 7. Other Long-Term Liabilities Other long-term liabilities increased slightly to $17.241 million as of March 31, 2021, mainly driven by an increase in deferred compensation plan liability Other Long-Term Liabilities (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Contractor liability | $2,226 | $2,305 | | Deferred compensation plan liability | 11,758 | 10,087 | | Purchase commitments related to acquisition of GFPC | 3,257 | 3,910 | | Total | $17,241 | $16,302 | Note 8. Fair Value Measurements The Company's financial assets and liabilities measured at fair value, primarily investments and deferred compensation liabilities, are classified as Level I, totaling $12.263 million for assets and $11.758 million for liabilities as of March 31, 2021 Fair Value of Financial Assets and Liabilities (in thousands) | Category | March 31, 2021 Fair Value | December 31, 2020 Fair Value | | :--- | :--- | :--- | | Assets: | | | | Equity investment and alternative investment securities funds | $505 | $490 | | Assets to fund deferred compensation liability | 11,758 | 10,087 | | Total assets | $12,263 | $10,577 | | Liabilities: | | | | Deferred compensation liability | $11,758 | $10,087 | | Total liabilities | $11,758 | $10,087 | - All fair value measurements for both assets and liabilities are classified as Level I, based on month-end quoted market prices for net asset value of various funds and securities[56] - The Company recognized unrealized gains of $451 thousand related to the deferred compensation asset and other expenses of $451 thousand related to the deferred compensation liability for the three months ended March 31, 2021[56][58] Note 9. Asset-Based Expenses Asset-based expenses increased by 3.1% to $36.094 million for the three months ended March 31, 2021, primarily driven by higher strategist and manager fees and premier broker-dealer fees Asset-Based Expenses (in thousands) | Category | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Strategist and manager fees | $28,819 | $28,442 | | Premier broker-dealer fees | 3,882 | 3,059 | | Custody fees | 1,810 | 1,530 | | Fund advisory fees | 1,077 | 1,081 | | Marketing allowance | 505 | 903 | | Other | 1 | — | | Total | $36,094 | $35,015 | - Total asset-based expenses increased by $1.079 million (3.1%) year-over-year[60] Note 10. Debt The Company repaid its Prior Credit Agreement in December 2020 and entered into a new $250 million senior secured revolving credit facility, drawing down $75 million, resulting in a 52.6% decrease in interest expense year-over-year - On December 30, 2020, the Company entered into a New Credit Agreement for a $250 million revolving credit facility and drew down $75 million at an annual interest rate of 2.25%[61] - The proceeds from the New Revolving Credit Facility, along with cash on hand, were used to fully repay the previous Term Loan[61] - Interest expense decreased by $856 thousand (52.6%) from $1,627 thousand in Q1 2020 to $771 thousand in Q1 2021[16][61] Note 11. Leases The Company primarily has operating leases for facilities, with ROU assets and lease liabilities recognized on the balance sheet, incurring $1.306 million in operating lease costs for Q1 2021 and having $37.363 million in total future minimum lease payments - Operating lease ROU assets and liabilities are recognized based on the present value of lease payments, using an estimated incremental borrowing rate[62] - Operating lease costs were $1,306 thousand and related variable lease costs were $197 thousand for the three months ended March 31, 2021[63] Future Minimum Lease Payments (in thousands) as of March 31, 2021 | Period | Amount | | :--- | :--- | | Remainder of 2021 | $1,680 | | 2022 | 5,437 | | 2023 | 5,384 | | 2024 | 5,663 | | 2025 | 5,822 | | 2026 and thereafter | 13,377 | | Total future minimum lease payments | $37,363 | | Less: imputed interest | (4,713) | | Total operating lease liabilities | $32,650 | Note 12. Share-Based Compensation Share-based compensation expense significantly increased to $33.428 million for Q1 2021, primarily due to accelerated vesting of Restricted Stock Awards (RSAs) and new grants of Stock Appreciation Rights (SARs) - Total share-based compensation expense increased to $33,428 thousand for the three months ended March 31, 2021, up from $13,188 thousand in the prior year[22] - This increase was primarily driven by $30,574 thousand in RSA expense (up from $12,252 thousand in Q1 2020), with 3,148,573 RSAs vesting in Q1 2021[68] - New SARs were issued in 2020 with a grant date fair value of $9,239 thousand, contributing $750 thousand in expense for Q1 2021[72] Note 13. Commitments and Contingencies The Company is subject to litigation and regulatory investigations in the ordinary course of business, but management believes the ultimate resolution will not materially affect the consolidated financial condition, results of operations, or cash flows - The Company faces risks from litigation and regulatory investigations, including class action lawsuits and inquiries from state, federal, and other authorities[73] - A substantial legal liability or significant regulatory action could adversely affect business, financial condition, and results of operations, even if the company ultimately prevails[73] - Management, after consulting legal counsel, believes that the ultimate resolution of pending legal proceedings will not have a material effect on the consolidated financial condition, results of operations, or cash flows[73] Note 14. Income Taxes The Company's effective income tax rate was 47.7% for Q1 2021, a significant change from (51.4)% in Q1 2020, primarily due to the income tax effects of increased share-based compensation relative to income before taxes - The effective income tax rate was 47.7% for the three months ended March 31, 2021, compared to (51.4)% for the same period in 2020[74] - This change was primarily due to changes in the relative amounts of share-based compensation and income before taxes across periods[74] - The Coronavirus Aid, Relief, and Economic Security (CARES) Act had no significant impact on the Company's financial condition and results of operations for Q1 2021[75] Note 15. Related Party Transactions As of March 31, 2021, the Company had a $143 thousand receivable from Huatai Securities Co., Ltd. (HTSC) for professional services related to HTSC's consolidated audit - As of March 31, 2021, the Company had a $143 thousand receivable from Huatai Securities Co., Ltd. (HTSC)[77] - This receivable represents cash paid by the Company for professional services incurred on behalf of HTSC related to IFRS audit fees[77] Note 16. Net Income (loss) Per Share Attributable to Common Stockholders Basic and diluted net loss per share for Q1 2021 was $(0.13), a decrease from net income per share of $0.04 in Q1 2020, primarily due to the net loss incurred Net Income (Loss) Per Share Attributable to Common Stockholders | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders (in thousands) | $(8,916) | $2,736 | | Weighted average number of shares outstanding, basic | 70,422,306 | 67,142,459 | | Net income (loss) per share, basic | $(0.13) | $0.04 | | Weighted average shares used in computing diluted EPS | 70,422,306 | 69,317,261 | | Net income (loss) per share, diluted | $(0.13) | $0.04 | - Certain securities (stock options, SARs, RSUs, RSAs) were not included in diluted EPS calculation for Q1 2021 as they did not have a dilutive effect due to the net loss[80] Note 17. Subsequent Events There were no subsequent events reported after March 31, 2021 - No subsequent events were reported after the period ended March 31, 2021[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews AssetMark's Q1 2021 financial performance and operational metrics, highlighting revenue growth, a net loss driven by increased share-based compensation, and significant asset and adviser growth Overview AssetMark is a leading provider of wealth management and technology solutions for independent financial advisers, offering an end-to-end platform that supports client engagement, financial planning, performance reporting, and billing, enabling advisers to grow their businesses - AssetMark provides extensive wealth management and technology solutions to independent financial advisers, enabling them to outsource high-cost and specialty services[83] - The platform offers an end-to-end experience, covering client engagement, financial planning, performance reporting, and billing, to enhance adviser efficiency and business growth[83] Financial Highlights For Q1 2021, total revenue increased by 3.6% to $119.0 million, driven by a 9.6% rise in asset-based revenue, but the company reported a net loss of $8.9 million, or $(0.13) per share, compared to net income of $2.7 million in Q1 2020, primarily due to increased expenses Financial Highlights (in millions, except per share data) | Metric | Q1 2021 | Q1 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total revenue | $119.0 | $114.9 | 3.6% | | Asset-based revenue | $115.8 | $105.7 | 9.6% | | Spread-based revenue | $2.6 | $7.9 | (67.2)% | | Net income (loss) | $(8.9) | $2.7 | (429.6)% | | Net income (loss) per share | $(0.13) | $0.04 | (425.0)% | | Adjusted net income | $22.2 | $17.7 | 25.4% | | Adjusted EBITDA | $34.1 | $28.4 | 20.1% | Asset and Adviser Growth Trends Platform assets grew significantly by 40.8% to $78.9 billion as of March 31, 2021, while the number of engaged advisers increased by 22.1% to 2,611 Asset and Adviser Growth Trends | Metric | March 31, 2021 | March 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Platform assets | $78.9 billion | $56.0 billion | 40.8% | | Engaged advisers | 2,611 | 2,138 | 22.1% | Key Factors Affecting Our Performance The Company's performance is influenced by its ability to expand its financial adviser base, attract new advisers by capitalizing on industry trends, and continuous investment in technology, with competition, market conditions, and strategic acquisitions also playing crucial roles - Performance depends on attracting new advisers and increasing 'share of wallet' from existing advisers through its end-to-end wealth management offering[87] - Continued investment in technology ($259 million from 2015-2021) is crucial for revenue growth and delivering efficient solutions, despite potential short-term profitability impacts[90] - Revenue is heavily influenced by market and economic conditions, as most revenue is asset-based, and spread-based revenue is sensitive to interest rate changes[93] - Strategic acquisitions, such as Voyant Inc. in March 2021, are pursued to enhance scale, operating leverage, and capabilities[94] - The COVID-19 pandemic has adversely impacted asset- and spread-based revenue due to market declines and lower interest rates, but the company maintains positive operating cash flows and liquidity[95][96] Key Operating Metrics AssetMark tracks various operational and financial metrics to measure performance, including platform assets which reached $78.88 billion, net flows of $1.927 billion for Q1 2021, 2,611 engaged advisers, and assets in custody at ATC increasing to $57.778 billion Key Operating Metrics (in millions, except percentages and adviser/household counts) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Platform assets (at period-beginning) | $74,520 | $61,608 | | Net flows | $1,927 | $1,834 | | Market impact net of fees | $2,433 | $(9,477) | | Acquisition impact | — | $2,060 | | Platform assets (at period-end) | $78,880 | $56,025 | | Net flows lift (% of beginning-of-year platform assets) | 2.6% | 3.0% | | Advisers (at period-end) | 8,477 | 8,477 | | Engaged advisers (at period-end) | 2,611 | 2,138 | | Assets from engaged advisers (at period-end) | $71,635 | $48,793 | | Households (at period-end) | 190,915 | 176,681 | | New producing advisers | 194 | 217 | | Production lift from existing advisers (annualized %) | 21.8% | 23.3% | | Assets in custody at ATC (at period-end) | $57,778 | $38,770 | | ATC client cash (at period-end) | $2,497 | $2,991 | | Total revenue | $119 | $115 | | Net income (loss) | $(8.9) | $2.7 | | Net income (loss) margin (%) | (7.5)% | 2.4% | | Capital expenditure | $8.2 | $6.5 | | Adjusted EBITDA | $34.1 | $28.4 | | Adjusted EBITDA margin (%) | 28.6% | 24.7% | | Adjusted net income | $22.2 | $17.7 | - Platform assets increased significantly year-over-year due to market recovery and growth, reaching $78,880 million as of March 31, 2021[101] - ATC client cash, a primary source of spread-based revenue, decreased from $2,991 million in Q1 2020 to $2,497 million in Q1 2021, representing 4.3% of total assets in custody[112] Non-GAAP Financial Metrics The Company uses Adjusted EBITDA and Adjusted Net Income as non-GAAP metrics to assess operating performance, excluding non-cash charges and other adjustments; for Q1 2021, Adjusted EBITDA was $34.1 million (28.6% margin) and Adjusted Net Income was $22.2 million, both showing increases from Q1 2020 Adjusted EBITDA Reconciliation (in thousands, except percentages) | Metric | 2021 | 2020 | 2021 (%) | 2020 (%) | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(8,916) | $2,736 | (7.5)% | 2.4% | | Provision for (benefit from) income taxes | (8,126) | (929) | (6.8)% | (0.8)% | | Interest income (loss) | (25) | (482) | (—)% | (0.4)% | | Interest expense | 771 | 1,627 | 0.6% | 1.4% | | Amortization/depreciation | 9,471 | 8,409 | 8.0% | 7.3% | | EBITDA | $(6,825) | $11,361 | (5.7)% | 9.9% | | Share-based compensation | 33,428 | 13,188 | 28.0% | 11.5% | | Reorganization and integration costs | 4,496 | 103 | 3.8% | 0.1% | | Acquisition expenses | 2,817 | 3,577 | 2.3% | 3.1% | | Business continuity plan | 72 | 96 | 0.1% | 0.1% | | Office closures | 121 | — | 0.1% | — | | Other expenses | (15) | 50 | (—)% | — | | Adjusted EBITDA | $34,094 | $28,375 | 28.6% | 24.7% | Adjusted Net Income Reconciliation (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net income (loss) | $(8,916) | $2,736 | | Acquisition-related amortization | 5,108 | 5,108 | | Expense adjustments | 7,490 | 3,825 | | Share-based compensation | 33,428 | 13,188 | | Tax effect of adjustments | (14,937) | (7,150) | | Adjusted net income | $22,173 | $17,707 | - Adjusted EBITDA and Adjusted Net Income are used to evaluate operating performance by excluding non-cash items and non-recurring costs like share-based compensation, acquisition expenses, and reorganization costs[117][126] Components of Results of Operations This section details the components of revenue and operating expenses, showing that asset-based revenue, comprising 97.3% of total revenue, increased due to higher assets under management, while spread-based revenue significantly decreased due to lower interest rates, and operating expenses rose primarily from increased employee compensation - Asset-based revenue accounted for approximately 97.3% of total revenue in Q1 2021, increasing due to higher assets under management from market recovery[132] - Spread-based revenue decreased significantly in Q1 2021 due to the continued decline in U.S. interest rates[133] - Employee compensation increased substantially, primarily due to non-cash share-based compensation and reorganization expenses[138] - General and operating expenses are expected to increase in future periods due to costs associated with being a publicly traded company[139] Results of Operations (Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020) For Q1 2021, total revenue increased by 3.6% to $119.0 million, driven by a 9.6% rise in asset-based revenue, partially offset by a 67.2% decline in spread-based revenue, while total operating expenses surged by 21.4% to $135.3 million, leading to a net loss of $8.9 million Results of Operations (in thousands) | Category | Q1 2021 | Q1 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue: | | | | | | Asset-based revenue | $115,813 | $105,650 | $10,163 | 9.6 | | Spread-based revenue | 2,606 | 7,951 | (5,345) | (67.2) | | Other revenue | 587 | 1,289 | (702) | (54.5) | | Total revenue | 119,006 | 114,890 | 4,116 | 3.6 | | Operating expenses: | | | | | | Asset-based expenses | 36,094 | 35,015 | 1,079 | 3.1 | | Spread-based expenses | 676 | 1,289 | (613) | (47.6) | | Employee compensation | 67,302 | 43,497 | 23,805 | 54.7 | | General and operating expenses | 17,489 | 19,365 | (1,876) | (9.7) | | Professional fees | 4,260 | 3,831 | 429 | 11.2 | | Depreciation and amortization | 9,471 | 8,409 | 1,062 | 12.6 | | Total operating expenses | 135,292 | 111,406 | 23,886 | 21.4 | | Interest expense | 771 | 1,627 | (856) | (52.6) | | Other expense, net | (15) | 50 | (65) | (130.0) | | Income (loss) before income taxes | (17,042) | 1,807 | (18,849) | (1,043.1) | | Provision for (benefit from) income taxes | (8,126) | (929) | (7,197) | 774.7 | | Net comprehensive income (loss) | $(8,916) | $2,736 | $(11,652) | (425.9) | - Employee compensation increased by $23.8 million (54.7%) due to a $20.2 million increase in share-based compensation (related to former CEO's departure and accelerated RSAs) and a $2.1 million increase in reorganization costs[152] - General and operating expenses decreased by $1.9 million (9.7%), primarily due to a $5.3 million decrease in travel and event costs, partially offset by higher reorganization costs and software expenses[153] Liquidity and Capital Resources The Company's liquidity is primarily financed by cash flows from operations and a new $250 million revolving credit facility, with $75 million drawn, and as of March 31, 2021, cash and cash equivalents were $75.8 million, with the Company in compliance with all financial covenants - As of March 31, 2021, the Company had $75.8 million in cash and cash equivalents and $11.0 million in restricted cash[160] - The Company's liquidity needs are expected to be met by cash from operations and the $250 million New Revolving Credit Facility, with $75 million drawn as of December 30, 2020[160][163][164] - Cash flows from operating activities increased by $5.4 million in Q1 2021, primarily due to increased share-based compensation and depreciation/amortization, offset by a net loss[170] - Cash used in investing activities decreased by $16.5 million in Q1 2021, mainly due to the absence of the OBS acquisition payment made in Q1 2020, partially offset by increased capital expenditures[171] - As of March 31, 2021, the Company was in compliance with all applicable covenants under the New Credit Agreement, including Total Leverage Ratio and interest coverage ratio[167] Contractual Obligations There have been no material changes to the Company's contractual obligations and commitments as of March 31, 2021, compared to those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to contractual obligations and commitments were reported as of March 31, 2021, compared to the prior Annual Report on Form 10-K[173] Off-Balance Sheet Arrangements The Company had no off-balance sheet arrangements as of December 31, 2020, and March 31, 2021 - The Company had no off-balance sheet arrangements as of December 31, 2020, and March 31, 2021[174] JOBS Act Accounting Election As an emerging growth company under the JOBS Act, the Company has elected to use the extended transition period for complying with new or revised financial accounting standards - As an 'emerging growth company' under the JOBS Act, the Company has elected to use the extended transition period for new or revised accounting standards[175] Critical Accounting Policies and Estimates The Company's financial statements rely on GAAP and require estimates, assumptions, and judgments, with critical accounting policies detailed in the Annual Report on Form 10-K and Note 2 of this report - Financial statements are prepared in accordance with GAAP, requiring estimates, assumptions, and judgments that can materially affect results[176] - Critical accounting policies, defined by material judgment and potential impact on results, are detailed in the Annual Report on Form 10-K and Note 2[176] Recently Issued Accounting Pronouncements Information regarding recently issued accounting pronouncements is provided in Note 2 to the unaudited condensed consolidated financial statements - Details on recently issued accounting pronouncements are available in Note 2 of the unaudited condensed consolidated financial statements[177] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk, primarily from asset-based revenue fluctuations due to changes in platform asset values, and interest rate risk affecting spread-based revenue and borrowing costs, with operational risks also being significant Market Risk The Company's market risk is directly tied to asset-based revenue, which constituted 97% of total revenue in Q1 2021, where a 1% decrease in platform asset value could lead to a 1% decline in total revenue and an 8% decline in pre-tax income - 97% of total revenue in Q1 2021 was derived from asset-based fees, directly linked to the market value of assets on the platform[178] - A 1% decrease in aggregate platform asset value could result in a 1% decline in total revenue and an 8% decline ($0.8 million) in pre-tax income[178] Interest Rate Risk Interest rate changes significantly impact spread-based revenue and borrowing costs; a 100 basis point change in short-term interest rates could alter annual pre-tax income by approximately $26 million, and borrowing costs would increase by about $0.8 million annually for every 100 basis point LIBOR increase - A 100 basis point change in short-term interest rates could increase or decrease annual pre-tax income by approximately $26 million, based on $2.5 billion in client cash at ATC[180] - A 100 basis point increase in LIBOR-based interest rates would increase annual interest expense by approximately $0.8 million on amounts drawn under the New Revolving Credit Facility[181] Operational Risk Operational risk encompasses losses from improper transaction execution, technology deficiencies, or control breaches, which could lead to financial loss, regulatory sanctions, or reputational damage, especially during high market volatility - Operational risk includes losses from improper transaction execution, technology deficiencies, and control breaches, which can lead to financial loss, regulatory sanctions, or reputational damage[182] - The Company relies on its employees and systems to process a large number of transactions, and failures in these areas, particularly during high market volatility, could increase financial losses[182] - Mitigation strategies include business continuity plans, system redundancies, and specific policies and procedures to identify and manage operational risk[182] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of March 31, 2021, providing reasonable assurance for timely and accurate financial reporting, with no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures As of March 31, 2021, the Company's management, with the participation of its principal executive and financial officers, concluded that its disclosure controls and procedures were effective at a reasonable assurance level - Management, including the principal executive and financial officers, evaluated and concluded that disclosure controls and procedures were effective as of March 31, 2021[183] - Disclosure controls are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[183] Changes in Internal Control over Financial Reporting There were no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2021 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2021[184] Inherent Limitations on Effectiveness of Controls Controls and procedures, regardless of design, can only offer reasonable assurance of achieving objectives, and management applies judgment in evaluating cost-benefit, as absolute assurance against misstatements or fraud is not possible - Controls and procedures provide only reasonable assurance, and management's judgment is applied in evaluating their cost-benefit relationship[185] - No evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or be detected[185] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company and its subsidiaries are regularly subject to regulatory examinations and inquiries, including an SEC examination report and subpoenas related to potential conflicts of interest disclosures, but management believes these will not materially affect financial condition or results of operations - The Company's SEC-registered subsidiaries received an examination report and subpoenas from the SEC's Division of Enforcement in July 2020, primarily related to disclosure of potential conflicts of interest[186] - The inquiries are part of a broader SEC initiative examining conflicts of interest in the investment advisory industry[186] - Management is cooperating fully and believes the ultimate resolution will not have a material effect on the consolidated financial condition, results of operations, or cash flows[186] Item 1A. Risk Factors This section details risks impacting the Company's operations, financial condition, and business, covering intellectual property, data privacy, cybersecurity, regulatory compliance, and controlling stockholder influence Risks Related to Our Business and Operations The Company faces business risks including revenue volatility from market conditions and interest rates, intense competition, reliance on advisers, fee pressures, operational challenges, and integration difficulties from acquisitions - Revenue may fluctuate due to declines in financial market assets, lower interest rates, securities price volatility (including from COVID-19), and downward pressure on fees[186][194] - The Company operates in an intensely competitive industry, facing firms with greater resources and potential in-house capabilities from clients, which could hurt financial performance[187][188] - Failure to introduce new investment solutions, remediate operational errors, or successfully convert client assets to its platform could materially adversely affect results[196][197][205] - Acquisitions pose integration difficulties, diversion of management resources, unanticipated costs, and potential dilution to stockholders[200] - The Company is exposed to liability for breaches of fiduciary duties, reputational harm from misconduct or conflicts of interest, and reliance on key personnel and third-party service providers[201][202][215][216] - Lack of liquidity or access to capital, and restrictions in debt agreements, could impair business and financial condition, potentially forcing asset sales or refinancing[219][223][224] Risks Related to Intellectual Property, Data Privacy and Cybersecurity The Company faces significant risks from data storage, cybersecurity threats, and evolving data privacy laws, potentially leading to regulatory actions, litigation, reputational harm, and costly compliance or intellectual property infringement issues - Storing extensive personal investment and financial information exposes the Company to liability from inappropriate disclosure, network penetration, or misappropriation, leading to regulatory investigations, fines, and reputational harm[229] - The Company is exposed to data and cybersecurity risks, including cyber-attacks, fraudulent activity, and data breaches, which could result in service interruptions, harm to reputation, costly litigation, and significant liability[231][233] - Compliance with rapidly evolving data protection laws (e.g., CCPA, CPRA) is complex and costly, with potential for increased liabilities, restrictions on operations, and enforcement actions[237][238][239] - Failure to protect proprietary technology and intellectual property rights, or infringement upon third-party IP, could result in significant costs, diversion of management attention, and competitive injury[244][246] Risks Related to Our Controlling Stockholder's Ultimate Parent Being a PRC Company with Stock Listed in Hong Kong and Shanghai AssetMark is influenced by its PRC-controlled stockholder, subjecting it to PRC laws, stock exchange requirements, and potential CFIUS review for acquisitions, which may impact corporate decisions and transactions - The controlling stockholder, a PRC enterprise, is subject to PRC laws and regulations that may influence its decisions regarding AssetMark's business and operations, including requiring approval for certain corporate actions[253][254] - HTSC's listing on the Shanghai and Hong Kong Stock Exchanges requires shareholder approval for certain major transactions by AssetMark, such as asset purchases/sales, mergers, and share issuances, which could restrict AssetMark's ability to engage in such transactions[255][256] - As a 'foreign person' under CFIUS regulations due to HTSC's ownership, AssetMark's future acquisitions or investments in U.S. businesses may be subject to CFIUS review, potentially leading to delays, conditions, or prevention of transactions[259] Risks Related to Regulation and Litigation Operating in a highly regulated industry, the Company faces risks from non-compliance, changing laws, internal control weaknesses, ERISA issues, and litigation, which could lead to fines, sanctions, or business practice changes - The Company is subject to extensive government regulation in the U.S. (SEC, CFTC, FINRA, state laws), and non-compliance could result in fines, suspensions, or revocation of registrations[260][261][262][263][265] - Changes to laws or regulations, such as Reg BI and Form CRS, or new interpretations, could adversely affect business models, increase liability, and raise compliance costs[266][267] - Failure to maintain effective internal controls, comply with ERISA and Internal Revenue Code regulations, or properly disclose conflicts of interest could lead to reputational harm, litigation, and penalties[269][270][272] - A change of control may require FINRA approval and client consent to advisory agreements, and failure to obtain these could adversely affect operations[273][274] Risks Related to Ownership of Our Common Stock HTSC's majority ownership controls decisions, potentially conflicting with other stockholders, while stock price volatility, reduced investor protections as a 'controlled' and 'emerging growth' company, and increased compliance costs pose risks - HTSC's 70.2% voting interest allows it to control management and stockholder approval matters, potentially delaying change of control or influencing decisions in its own interest[275][276] - The common stock price may be highly volatile due to market conditions, financial results, new products, analyst reports, and potential sales of large blocks of stock by existing stockholders[277][280] - As a 'controlled company' and 'emerging growth company,' the Company relies on exemptions from certain NYSE corporate governance and SEC disclosure requirements, which may reduce investor protections and affect stock attractiveness[284][286] - Becoming a fully compliant public company will strain resources and management, incurring increased costs and potentially distracting from business operations[287][288][289] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report - This section is marked as 'Not applicable'[299] Item 3. Defaults Upon Senior Securities This item is not applicable to the current report - This section is marked as 'Not applicable'[299] Item 4. Mine Safety Disclosures This item is not applicable to the current report - This section is marked as 'Not applicable'[299] Item 5. Other Information This item is not applicable to the current report - This section is marked as 'Not applicable'[299] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, agreements, certifications, and XBRL-related documents - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, Registration Rights Agreement, Separation Agreement, Subsidiaries list, and various certifications (e.g., 302 and 906 certifications)[301] - XBRL (eXtensible Business Reporting Language) documents are also filed, including the Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase[301] Signatures The Quarterly Report on Form 10-Q was duly signed on behalf of AssetMark Financial Holdings, Inc. by its Chief Executive Officer, Natalie Wolfsen, and Chief Financial Officer, Gary Zyla, on May 7, 2021 - The Quarterly Report on Form 10-Q was signed by Natalie Wolfsen, Chief Executive Officer, and Gary Zyla, Chief Financial Officer, on May 7, 2021[303][304]