AssetMark Financial Holdings, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2019

For the transition period from to

Commission File Number: 001-38980

ASSETMARK FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

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.

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 July 31, 2019, the number of shares of the registrant’s common stock outstanding was 72,400,000.

ASSETMARK FINANCIAL HOLDINGS, INC.

TABLE OF CONTENTS

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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, ability to close and execute on strategic transactions and ability to comply with existing, modified and new laws and regulations applying to our business and the expected date of the expiration of the lock-up agreements entered into in connection with our initial public offering. 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.

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PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements.

AssetMark Financial Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands except share data and par value)

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

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AssetMark Financial Holdings, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands except share and per share data)

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

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AssetMark Financial Holdings, Inc.

Unaudited Condensed Consolidated Statements of Stockholder’s Equity

(in thousands except share data)

For the three months ended June 30, 2019 and 2018

For the six months ended June 30, 2019 and 2018

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

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AssetMark Financial Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

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

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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, LLC and Global Financial Advisory, LLC (collectively, the “Company”).

The Company’s legal entity structure as of June 30, 2019:

As of June 30, 2019, the Company was a wholly owned subsidiary of AssetMark Holdings LLC (“AssetMark Holdings”), which was organized for the purpose of acquiring the Company effective October 31, 2016. AssetMark Holdings was 98.58% owned by affiliates of Huatai Securities Co. Ltd. (“HTSC”) and 1.42% owned by management as of June 30, 2019. The Company was acquired from the private equity firms Aquiline Capital Partners LLC and Genstar Capital LLC.  On July 17, 2019, immediately following the pricing of its initial public offering (the “IPO”), AssetMark Holdings liquidated and dissolved and distributed shares of the Company’s common stock to its members and the Company ceased to be a wholly owned subsidiary of AssetMark Holdings.

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AssetMark Financial Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 (“AssetMark Trust”) 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. AssetMark Trust 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 incorproated 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 providing an open-architecture product platform along with tailored client advice, asset allocation options, practice management, support services and techonolgy 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 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. Its 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, LLC (“GFPC”) 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.

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 (“U.S. 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 U.S. 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 and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ended December 31, 2019 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, 2018 included in the Company’s prospectus dated July 17, 2019 filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”).

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AssetMark Financial Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recent Accounting Pronouncements – Current Adoptions

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which clarifies how to classify certain types of cash payments and receipts on the statement of cash flows. The following amendments in ASU 2016-15 are or may be relevant to the Company: (1) debt prepayment or extinguishment costs should be classified as financing cash outflows; (2) cash consideration payments made soon after an acquisition’s consummation date (approximately three months or less) should be classified as cash outflows for investing activities; payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability; payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities; (3) proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement); (4) for distributions received from equity-method investments, companies may elect either a cumulative-earnings approach or the nature-of-distribution approach to determine whether distributions received from the equity method investees are returns on investment (operating cash inflows) or returns of investment (investing cash inflows); and (5) in the absence of specific guidance, companies determine each separately identifiable cash source and classify the receipt or payment based on the nature of the cash flow. ASU 2016-15 was effective for non-emerging growth companies on January 1, 2018, and required retrospective application. Companies were required to adopt all amendments at the same time. The Company adopted this ASU on January 1, 2019, and it did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which makes targeted improvements to the accounting for, and presentation and disclosure of, financial instruments. ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. ASU 2016-01 does not affect the accounting for investments that would otherwise be consolidated or accounted for under the equity method. The new standard also affects financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The provisions of ASU 2016-01 were effective for the Company in fiscal years beginning after December 15, 2018. The Company adopted this ASU in 2019, and it did not have a significant impact on its consolidated financial statements.

Recent Accounting Pronouncements – Not Yet 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 an 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 new standard was effective for non-emerging growth companies on January 1, 2019, with early adoption permitted. The Company is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and plans to adopt the new standard on January 1, 2020.

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 is also recognized. The new standard is effective for non-emerging growth companies on January 1, 2020, with early adoption permitted. The Company is currently evaluating the effect that ASU 2018-15 will have on its consolidated financial statements and plans to adopt the new standard on January 1, 2021.

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AssetMark Financial Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Acquisition of Global Financial Private Capital, LLC and Global Financial Advisory, LLC

On August 11, 2018, the Company entered into a unit purchase agreement to acquire Global Financial Private Capital, LLC and Global Financial Advisory, LLC for $55,000, subject to a purchase price adjustment based on a client attrition calculation and closing conditions that included approval from the Committee on Foreign Investment in the United States (“CFIUS”). On April 16, 2019, the Company closed the acquisition and paid a final purchase price of $35,906, net of working capital adjustments of $3,723 and client attrition adjustments. The Company recorded goodwill of $27,078, adviser relationships of $14,250, and deferred tax assets of $4,452 in connection with the acquisition.

Note 4. Goodwill and Intangible Assets

Goodwill

The Company’s goodwill balance was $325,493 and $298,415 as of June 30, 2019 and December 31, 2018, respectively. The Company, which has one reporting unit, performed an annual test for goodwill impairment in December for the years ended December 31, 2018 and 2017 and determined that goodwill was not impaired. There have been no significant events or circumstances affecting the valuation of goodwill subsequent to the Company’s annual assessment.

Intangible Assets

Information regarding the Company’s intangible assets is as follows:

The weighted average estimated remaining useful life was 16.7 years for trade names, the broker-dealer license, AssetMark Trust regulatory status and GFPC adviser relationships as of June 30, 2019. Amortization expense for definite-lived intangible assets was $1,009 for the three months ended June 30, 2019 and 2018. Amortization expense was $2,229 and $2,016 for the six months ended June 30, 2019 and 2018, respectively. The Company performed an annual test for intangible assets impairment in December for the years ended December 31, 2018 and 2017 and determined that intangible assets were not impaired. There have been no significant events or circumstances affecting the valuation of intangible assets subsequent to the Company’s annual assessment.

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AssetMark Financial Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The expected future amortization expense for intangible assets as of June 30, 2019 is as follows:

Note 5. Accrued Expenses and Other Current Liabilities

The following table shows the breakdown of accrued expenses and other current liabilities:

Note 6. Other-Long-Term Liabilities

Other long-term liabilities consisted of the following:

Note 7. Asset-Based Expenses

Asset-based expenses incurred by the Company relating to the generation of asset-based revenues are:

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AssetMark Financial Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Debt

On November 14, 2018, the Company executed a Credit Agreement with Credit Suisse AG for a $250,000 term loan and a revolving line of credit that permits the Company to borrow up to $20,000. 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 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 will be reduced by 0.25% following an initial public offering. The term loan matures on November 14, 2025 and the revolving line of credit matures on November 14, 2023. As of June 30, 2019, $248.7 million aggregate principal amount of the term loan remained outstanding and the revolving line of credit was undrawn. Interest expense was $4,031 and $0 for the three months ended June 30, 2019 and 2018, respectively. Interest expense was $8,055 and $0 for the six months ended June 30, 2019 and 2018, respectively. See Note 12 for information regarding the Company’s completion of the IPO and a subsequent partial principal repayment of the term loan.

Note 9. Commitments and Contingencies

Litigation

The Company faces the risk of litigation and regulatory investigations and actions in the ordinary course of operating its businesses, 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 10. 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.

Our effective tax rate was 50.4% and 31.9% for the three months ended June 30, 2019 and 2018, respectively. Our effective tax rate was 52.7% and 30.1% for the six months ended June 30, 2019 and 2018, respectively.

Note 11. Related Party Transactions

Due to the outstanding Class C Common Units being accounted for as a liability-classified award, AssetMark Holdings maintained an investment in the Company and an offsetting share-based compensation liability of $24,992 as of June 30, 2019, which represented the estimated value of the share-based employee compensation. The Company recorded these amounts as an expense and an increase to paid-in capital in 2019 and 2018.

As of June 30, 2019, the Company had a receivable due from AssetMark Holdings of $314, which represents the cash paid by the Company on behalf of AssetMark Holdings with respect to certain taxes payable in connection with the Company’s distribution to AssetMark Holdings in the fourth quarter of 2018.

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AssetMark Financial Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Subsequent Events

On July 3, 2019, the Company’s Board of Directors adopted, and the Company’s sole stockholder approved, the 2019 Equity Incentive Plan (the “Plan”), which became effective on July 17, 2019, the date of effectiveness of the Company’s registration statement on Form S-1.  As of August 20, 2019, 4,801,954 shares were available for issuance under the Plan, which amount excluded the 85,737 shares of common stock subject to restricted stock units granted under the Plan immediately following the pricing of the Company’s IPO. Share and per share data shown in the accompanying unaudited condensed consolidated financial statements and related notes have not been retroactively revised to reflect these issuances, nor do they include the shares sold and related proceeds received by the Company from the IPO.

On July 5, 2019, the Company filed an amended and restated certificate of incorporation effecting a 661,500-for-one forward stock split. The par value was adjusted to $0.001 per share of common stock in connection with such filing. The number of authorized shares of common stock was increased to 675,000,000 and 75,000,000 shares of preferred stock were authorized to be issued; no preferred stock had been issued as of August 20, 2019. All share and per share data shown in the accompanying unaudited condensed consolidated financial statements and related notes thereto have been retroactively revised to reflect the forward stock split.  

On July 22, 2019, the Company completed its IPO, in which the Company issued and sold an aggregate of 6.25 million shares of its common stock at a price to the public of $22.00 per share. The Company received aggregate net proceeds of $124.4 million from the IPO after deducting underwriting discounts and commissions and offering expenses payable by the Company. Immediately following the pricing of the IPO, AssetMark Holdings liquidated and dissolved and distributed shares of the Company’s common stock to its members as follows: holders of Class A Common Units and Class B Common Units of AssetMark Holdings received an aggregate of 59,840,951 shares of the Company’s common stock, and holders of Class C Common Units of AssetMark Holdings received an aggregate number of restricted stock awards equal to 6,309,049 shares of the Company’s common stock. As of July 22, 2019, 72.4 million shares of the Company’s common stock were outstanding.

On July 26, 2019, the Company made a partial repayment of $125 million of the Company’s outstanding indebtedness under the term loan.

Any material subsequent events have been considered for disclosure through August 20, 2019, the date on which the financial statements were made available.

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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 and 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.

Business Highlights

Financial Highlights

Asset and Adviser Growth Trends

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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 2017 to 48% in 2022, 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 66% from 548 new producing advisers in 2014 to 910 in 2018. Our business will depend in part on our ability to continue to attract new advisers to our platform.

Technology Development

We invested $164 million in the development of our technology and our dedicated technology team from January 1, 2015 to June 30, 2019. 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 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) technology 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 and helping to minimize revenue fluctuations stemming from market volatility. In addition, we realize spread-based revenue, which represents a growing portion of our revenue. Spread-based revenue is subject to change based on interest rate changes and the amount of cash held by investors at our proprietary trust company.

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Acquisitions

Our ability to pursue and execute strategic transactions may impact our assets and revenue. From 2014 to 2018, we acquired the platform assets of two firms, which collectively have added $3.5 billion in assets. Subsequently, in April 2019, we closed our acquisition of GFPC following CFIUS clearance and FINRA approval, for a total cash purchase price of $35.9 million. This acquisition added another $3.8 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.

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.

Key metrics for the three months ended June 30, 2019 and 2018 and the six months ended June 30, 2019 and 2018 include the following:

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Platform Assets (At Period-End)

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, “All 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 $56,051 million and $45,274 million as of June 30, 2019 and June 30, 2018, respectively. Our regulatory AUM totaled $34,435 million and $30,065 million as of June 30, 2019 and June 30, 2018, 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 and Market Impact Net of Fees

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.

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 (Year-to-Date)

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 attributable to existing advisers (excluding GFPC advisers) for such period by platform assets as of the beginning of the year. 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.

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ATC Client Cash

In general, all accounts with AssetMark Trust Company 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 December 31, 2018 and June 30, 2019, ATC client cash accounted for 5% and 4%, respectively, of the total assets in custody at ATC. As of December 31, 2018 and June 30, 2019, 86% and 98%,  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.

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

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 is a useful financial metric in assessing our operating performance from period to period by excluding 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, 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:

We use adjusted EBITDA:

Adjusted EBITDA 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:

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Set forth below is a reconciliation from net income, the most directly comparable U.S. GAAP financial measure, to adjusted EBITDA for the three months ended June 30, 2019 and 2018 and the six months ended June 30, 2019 and 2018.

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:

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Adjusted net income does not purport to be an alternative to net income (loss) 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 (loss), 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:

Set forth below is a reconciliation from net income, the most directly comparable U.S. GAAP financial measure, to adjusted net income for the three months ended June 30, 2019 and 2018 and the six months ended June 30, 2019 and 2018.

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 90.2% and 93.8% of our total revenue for the three months ended June 30, 2018 and 2019, respectively, and approximately 90.1% and 94.2% of our total revenue for the six months ended June 30, 2018 and 2019, respectively.

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.

Other Income

Other income consists primarily of interest earned on operating cash held by us. Other one-time income items are reported under “Other Income,” as discussed elsewhere in this section.

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Expenses

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.

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 and compensation expenses in the next 12 months will arise in connection with additional non-cash share-based compensation and increased headcount to support our growth strategy.

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 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 HTSC in 2016. Depreciation expense reflects the ongoing cost of annual usage of property and equipment.

Interest Income and Other Income (Expense) Net

We earn interest income on our operating cash and cash equivalents (cash and investments), which may fluctuate over time.

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Results of Operations

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

The following discussion presents an analysis of our results of operations for the three months ended June 30, 2019 and 2018. 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.