AssetMark(US:AMK)2021-08-05 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited financial statements for Q2 2021 show significant asset growth and a return to net income, driven by strong revenue Condensed Consolidated Balance Sheets Total assets increased to $1.33 billion by June 30, 2021, driven by higher cash, long-term debt, and stockholders' equity Condensed Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,333,892 | $1,223,588 | | Cash and cash equivalents | $179,756 | $70,619 | | Goodwill | $338,848 | $338,848 | | Total Liabilities | $387,644 | $318,515 | | Long-term debt, net | $150,000 | $75,000 | | Total Stockholders' Equity | $946,248 | $905,073 | Condensed Consolidated Statements of Comprehensive Income The company achieved a significant profitability turnaround in Q2 2021, reporting net income of $10.0 million on 29.2% revenue growth Financial Performance Summary (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $128,042 | $99,131 | $247,048 | $214,021 | | Asset-based revenue | $124,690 | $94,712 | $240,503 | $200,362 | | Spread-based revenue | $2,672 | $3,549 | $5,278 | $11,500 | | Net Income (Loss) | $9,986 | $(9,280) | $1,070 | $(6,544) | | Diluted EPS | $0.14 | $(0.14) | $0.02 | $(0.10) | Condensed Consolidated Statements of Cash Flows Net cash from operations significantly increased to $53.3 million for H1 2021, contributing to a $109.1 million net cash increase Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $53,285 | $29,504 | | Net cash used in investing activities | $(19,148) | $(32,761) | | Net cash provided by financing activities | $75,000 | $— | | Net change in cash | $109,137 | $(3,257) | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, the Voyant acquisition, a new $250 million credit facility, and increased share-based compensation expense - On March 1, 2021, the Company agreed to acquire Voyant for approximately $145.5 million, consisting of cash and 994,028 shares of common stock, with the acquisition closing on July 1, 20214386 - The company entered a new $250 million revolving credit facility on December 30, 2020, drawing down $75 million in December 2020 and an additional $75 million on June 22, 202164 - Share-based compensation expense increased significantly to $40.1 million for the six months ended June 30, 2021, up from $27.1 million for the same period in 2020217173 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q2 2021 performance to significant platform asset growth and revenue increase, despite lower spread-based revenue Overview and Financial Highlights AssetMark reported strong Q2 2021 growth, with total revenue of $128.0 million, net income of $10.0 million, and platform assets reaching $84.6 billion Q2 2021 Financial Highlights vs. Q2 2020 | Metric | Q2 2021 | Q2 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $128.0M | $99.1M | +29.2% | | Net Income (Loss) | $10.0M | $(9.3)M | N/A | | Adjusted EBITDA | $40.0M | $25.3M | +58.1% | | Adjusted Net Income | $26.6M | $15.1M | +76.2% | Asset and Adviser Growth Trends (as of June 30) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Platform Assets | $84.6B | $63.2B | +33.8% | | Engaged Advisers | 2,691 | 2,327 | +15.6% | Key Operating Metrics Key operating metrics for H1 2021 show platform assets at $84.6 billion, driven by net flows and market impact, alongside strong Adjusted EBITDA and Net Income Key Metrics for the Six Months Ended June 30 | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Platform Assets (period-end) | $84,594M | $63,229M | | Net Flows | $4,155M | $2,742M | | Engaged Advisers (period-end) | 2,691 | 2,327 | | New Producing Advisers | 395 | 395 | | Adjusted EBITDA | $74.1M | $53.7M | | Adjusted EBITDA Margin | 30.0% | 25.1% | Adjusted EBITDA Reconciliation (in thousands) | Line Item | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | | Net income (loss) | $1,070 | $(6,544) | | Adjustments (Taxes, Interest, D&A) | $22,627 | $24,382 | | EBITDA | $23,699 | $17,858 | | Share-based compensation | $40,104 | $27,122 | | Other Adjustments | $10,229 | $8,724 | | Adjusted EBITDA | $74,132 | $53,704 | Results of Operations Q2 2021 revenue increased 29.2% to $128.0 million, driven by asset-based revenue growth, while operating expenses grew modestly, leading to income before taxes - Q2 2021 vs Q2 2020: - Asset-Based Revenue: Increased by $30.0 million (31.7%) due to growth in platform assets - Spread-Based Revenue: Decreased by $0.8 million (24.7%) due to the lower interest rate environment - Employee Compensation: Decreased by $5.9 million (13.0%), mainly from a $7.2 million reduction in share-based compensation expense162163168 - Six Months 2021 vs Six Months 2020: - Asset-Based Revenue: Increased by $40.1 million (20.0%) - Spread-Based Revenue: Decreased by $6.2 million (54.1%) - Employee Compensation: Increased by $17.9 million (20.1%), primarily driven by a $13.0 million increase in share-based compensation related to the departure of the former CEO177178183 Liquidity and Capital Resources Liquidity is strong, supported by $179.8 million in cash and a new $250 million revolving credit facility, with $150 million drawn for acquisitions - The company entered into a new $250 million senior secured revolving credit facility on December 30, 2020, which matures on December 30, 2024193194 - As of June 30, 2021, the company had drawn $150 million on its new credit facility, with a subsequent repayment of $25 million made on July 22, 202119588 - Cash flow from operations for the first six months of 2021 was $53.3 million, a significant increase from $29.5 million in the same period of 2020199201 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market and interest rate risks, with asset value changes impacting pre-tax income and interest rate shifts affecting revenue and expenses - A 1% decrease in the value of platform assets would have caused pre-tax income for the first six months of 2021 to decline by 5%, or $0.9 million208 - A 100 basis point change in short-term interest rates would result in an approximate $26 million annual change in income before taxes from the client cash deposit program210 - A 100 basis point increase in LIBOR-based rates would increase the company's annualized interest expense by approximately $1.5 million based on the debt outstanding at June 30, 2021211 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - The Principal Executive Officer and Principal Financial Officer concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level213 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls214 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is cooperating with SEC inquiries and subpoenas from July 2020 regarding potential conflicts of interest, as part of broader regulatory examinations - In July 2020, subsidiaries received an examination report and subpoenas from the SEC's Division of Examinations and Division of Enforcement, primarily related to the disclosure of potential conflicts of interest216 Item 1A. Risk Factors The company faces diverse risks including market volatility, competition, cybersecurity, regulatory oversight, and challenges related to its PRC-based controlling stockholder - Business risks include revenue fluctuations due to market conditions, intense competition, and reliance on the financial advisory industry216217220 - The company is exposed to significant data and cybersecurity risks, which could result in breaches, service interruptions, and liability, with risks heightened by the remote workforce261262 - The controlling stockholder (HTSC) is a PRC-based company, which subjects it to PRC laws that may influence decisions and requires CFIUS review for certain US acquisitions286292 - As a 'controlled company' due to HTSC's majority ownership, the company is exempt from certain NYSE corporate governance requirements, such as having a majority of independent directors319 Item 2-5. Other Information This section indicates no information to report for Items 2, 3, 4, and 5, covering unregistered sales, defaults, mine safety, and other disclosures - The report indicates 'Not applicable' for Items 2, 3, 4, and 5333334 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate foundational documents, agreements, and required officer certifications - The exhibits include foundational corporate documents, agreements, and required officer certifications (SOX 302 and 906)335337339