# Victory Capital Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2018

- Company: [Victory Capital Holdings, Inc.](/companies/vctr.md) (CIK 1570827)
- Form: 10-Q
- Filed: 2018-11-13
- Accepted by EDGAR: Nov 13, 2018, 16:02 ET
- Period: 2018-09-30
- Accession: 0001558370-18-009272
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1570827/000155837018009272/vctr-20180930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1570827/000155837018009272/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $31.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $88.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $6.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $16.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $20.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $49.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.29 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.71 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.30 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.76 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 71,863,566 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 70,168,116 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $99.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $694.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $3.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $25.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2018-09-30 | $786.2m | us-gaap:Assets |
| Total liabilities | at 2018-09-30 | $344.3m | us-gaap:Liabilities |
| Long-term debt | at 2018-09-30 | $268.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2018-09-30 | $441.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,789 characters.

***The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and our audited financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2017 Form 10-K. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period.***

### Overview

We are an investment management firm operating a next generation, integrated multi-boutique model with $63.6 billion in AUM as of September 30, 2018. Our differentiated model features a scalable operating platform that provides centralized distribution, marketing and operations infrastructure to our select group of Franchises and Solutions. Our earnings are primarily driven by asset-based fees charged for services related to the investment strategies we deliver and consist of investment management, fund administration and distribution fees.

Our Franchises are operationally integrated, but are separately branded and make investment decisions independently from one another within guidelines established by their respective investment mandates. Our integrated multi-boutique model creates a supportive environment in which our investment professionals, largely unencumbered by administrative and operational responsibilities, can focus on their pursuit of investment excellence. VCM employs all of our U.S. investment professionals across our Franchises, which are not separate legal entities.

Solutions consists of multi-Franchise and customized solutions strategies that are primarily rules-based. We offer Solutions through a variety of vehicles, including separate accounts, mutual funds and VictoryShares which is our ETF brand. Like our Franchises, our Solutions Platform is operationally integrated and supported by our centralized distribution, marketing and operational support functions.

We sell our products through our centralized distribution model with 92 professionals across both our institutional and retail distribution channels and marketing organization. Our institutional sales team focuses on cultivating relationships with institutional consultants, who account for the majority of the institutional market, as well as asset allocators seeking sub-advisers. Our retail sales team offers intermediary and retirement platform clients, including broker-dealers, retirement platforms and RIA networks, mutual funds and ETFs as well as SMAs through wrap fee programs and access to our investment models through UMAs.

We have grown our AUM from $17.9 billion following the management-led buyout with Crestview GP in August 2013 to $63.6 billion at September 30, 2018. We attribute this growth to our success in sourcing acquisitions and evolving them into organic growers, generating strong investment returns, and developing retail and institutional distribution channels with deep penetration.

### Agreement to Acquire Harvest

On September 21, 2018, we entered into an agreement to purchase 100% of the equity interests of Harvest. Harvest, which had approximately $12 billion in assets under management (AUM) as of September 30, 2018, is a leader in derivative asset management, specializing in yield enhancement overlay, risk reduction, alternative beta and absolute return investment strategies. Harvest offers a suite of strategies that are designed to provide investors with risk-managed sources of income, absolute return and varying levels of market exposure. Client demand for the Harvest’s strategies has been strong, resulting in meaningful growth in AUM since Harvest’s inception. Harvest was recently named 2017 “Overlay Manager of the Year” by EQDerivatives.

Victory’s integrated multi-boutique business model will enable Harvest to continue to employ its structured and disciplined investment process while remaining an independent brand. Harvest’s seasoned investment team will continue to leverage its proprietary technology platform to supports its analytic, trading and risk management functions. Following the closing of the Harvest Acquisition, Harvest’s senior management will be meaningful shareholders in the Company and will continue to be significant investors in the strategies that they manage.

The Harvest Acquisition will be financed through a combination of debt, equity and cash on the Company’s balance sheet, with the potential for an earn-out, payable to the sellers, over time if certain growth objectives are met. The Harvest Acquisition is expected to close around the end of the first quarter of 2019. See Note 3 of the unaudited condensed consolidated financial statements for further details on the Harvest Acquisition and Part II – Other Information - Item 1A “Risk Factors” for further discussion of the risks related to the Harvest Acquisition.

### Business Highlights

- AUM was $63.6 billion at September 30, 2018 compared to $62.3 billion at June 30, 2018, up 2% driven by market movement partially offset by net outflows. Our Solutions, Global / Non-U.S. Equity and Fixed Income asset classes saw net inflows during the quarter while U.S. Mid Cap Equity, Commodity, U.S Large Cap Equity and U.S. Small Cap Equity accounted for the majority of the net outflows. We generated $2.9 billion in gross flows and ($0.7) billion in negative net flows for the three months ended September 30, 2018 compared to $3.9 and ($0.8) billion, respectively, for the three months ended September 30, 2017.
- Our Franchises and Solutions had strong investment performance. As of September 30, 2018, 26 of our mutual funds and ETFs have overall Morningstar ratings of four or five stars and 68% of our fund AUM was rated four or five stars by Morningstar. As of September 30, 2018, 69% of our strategies by AUM had investment returns in excess of their respective benchmarks over a one-year period, 66% over a three-year period, 75% over a five-year period and 88% over a ten-year period. On an equal-weighted basis, 58% of our strategies have outperformed their benchmarks over a one-year period, 64% over a three-year period, 69% over a five-year period and 78% over a ten-year period.
- The industry recognized us for our achievements. For the fourth consecutive year, Victory has been ranked in the top 10 in their AUM category for Institutional Brand Awareness by eVestment. Victory ranked 6th among managers with $50-$100 billion in 2018, 4th among managers with $50-$100 billion in 2017 and 2016 and 1st among managers with $25-$50 billion in 2015.
- Total revenue for the three months ended September 30, 2018 was $108.1 million compared to $102.4 million for the three months ended September 30, 2017.
- Net income was $20.6 million for the three months ended September 30, 2018 compared to net income of $7.9 million for the three months ended September 30, 2017.
- Adjusted EBITDA was $43.3 million for the three months ended September 30, 2018 compared to $39.3 million for the three months ended September 30, 2017. See “—Supplemental Non-GAAP Financial Information” for more information about how we calculate Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.
- Adjusted Net Income was $29.0 million for the three months ended September 30, 2018 compared to $17.1 million for the three months ended September 30, 2017. See “—Supplemental Non-GAAP Financial Information” for more information about how we calculate Adjusted Net Income and a reconciliation of net income to Adjusted Net Income.

### Key Performance Indicators

When we review our performance we focus on the indicators described below:

*($ in millions)*

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| AUM at period end | $63,640 | $58,997 | $63,640 | $58,997 |
| Average AUM | 63,447 | 57,875 | 62,361 | 56,979 |
| Gross flows | 2,896 | 3,879 | 10,102 | 12,558 |
| Net flows (excluding Diversified)(1) | (672) | (778) | (1,408) | (1,146) |
| Total revenue | 108.1 | 102.4 | 317.4 | 304.0 |
| Revenue on average AUM | 68 bps | 70 bps | 68 bps | 71 bps |
| Net income | 20.6 | 7.9 | 49.8 | 14.6 |
| Adjusted EBITDA(2) | 43.3 | 39.3 | 123.8 | 109.0 |
| Adjusted EBITDA Margin(3) | 40.1% | 38.3% | 39.0% | 35.9% |
| Adjusted Net Income(2) | 29.0 | 17.1 | 78.6 | 44.0 |
| Tax benefit of goodwill and acquired intangibles(4) | 3.3 | 4.9 | 10.0 | 14.6 |

(1) Total net flows including Diversified were ($1,765) million for the nine months ended September 30, 2017.

(2) Our management uses Adjusted EBITDA and Adjusted Net Income to measure the operating profitability of the business. These measures eliminate the impact of one‑time acquisition, restructuring and integration costs and demonstrate the ongoing operating earnings metrics of the business. These measures are explained in more detail and reconciled to net income calculated in accordance with GAAP in “—Supplemental Non‑GAAP Financial Information.”

(3) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

(4) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted. The Tax Act significantly revised the U.S. corporate income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Effective January 1, 2018, we estimate the impact of the Tax Act lowered our combined statutory federal, state, local and foreign income tax rate from approximately 38% to approximately 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our combined statutory federal, state, local and foreign income tax rate also reduces the tax benefit resulting from the tax deduction of goodwill and acquired intangible assets beginning in 2018.

### Assets Under Management

Our profitability is largely affected by the level and composition of our AUM (including asset class and distribution channel) and the effective fee rates on our products. The amount and composition of our AUM are, and will continue to be, influenced by a number of factors, including:

- investment performance, including fluctuations in the financial markets and the quality of our investment decisions;
- client flows into and out of our various strategies and investment vehicles;
- industry trends toward products or strategies that we either do or do not offer;
- our ability to attract and retain high quality investment, distribution, marketing and management personnel;
- our decision to close strategies or limit growth of assets in a strategy when we believe it is in the best interest of our clients or conversely to re‑open strategies in part or entirely; and
- general investor sentiment and confidence.

Our goal is to establish and maintain a client base that is diversified by Franchise and Solutions, asset class, distribution channel and vehicle. The chart below sets forth our AUM by Franchise and Solutions as of September 30, 2018:

The following table presents our AUM by asset class as of the dates indicated:

*(in millions)*

|  | As of September 30, 2018 | 2017 |
| --- | ---: | ---: |
| U.S. Mid Cap Equity | $25,014 | $23,388 |
| U.S. Small Cap Equity | 16,438 | 14,833 |
| Fixed Income | 7,149 | 7,777 |
| U.S. Large Cap Equity | 4,644 | 4,806 |
| Global / Non-U.S. Equity | 4,738 | 3,735 |
| Solutions | 4,224 | 2,625 |
| Commodity | 966 | 1,517 |
| Other | 467 | 314 |
| **Total** | **$63,640** | **$58,997** |

The following table summarizes our asset flows by asset class for the periods indicated:

*(in millions)*

| For Three Months Ended September 30, 2018 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Commodity | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $24,485 | $15,971 | $6,978 | $4,577 | $4,705 | $3,815 | $1,291 | $434 | $62,256 |
| Gross client cash inflows | 964 | 740 | 449 | 42 | 307 | 321 | 27 | 46 | 2,896 |
| Gross client cash outflows | (1,660) | (860) | (346) | (179) | (193) | (61) | (238) | (31) | (3,568) |
| Net client cash flows | (696) | (120) | 103 | (137) | 114 | 260 | (211) | 15 | (672) |
| Net transfers | — | — | 1 | — | — | — | — | (1) | — |
| Market appreciation / (depreciation) | 1,225 | 587 | 67 | 204 | (81) | 149 | (114) | 19 | 2,056 |
| Ending AUM | $25,014 | $16,438 | $7,149 | $4,644 | $4,738 | $4,224 | $966 | $467 | $63,640 |
| **For Three Months Ended September 30, 2017** |  |  |  |  |  |  |  |  |  |
| Beginning AUM | $22,390 | $14,453 | $7,708 | $4,825 | $3,605 | $2,227 | $1,421 | $344 | $56,973 |
| Gross client cash inflows | 1,771 | 996 | 485 | 36 | 195 | 332 | 56 | 8 | 3,879 |
| Gross client cash outflows | (1,766) | (1,612) | (512) | (185) | (348) | (58) | (144) | (32) | (4,657) |
| Net client cash flows | 5 | (616) | (27) | (149) | (153) | 274 | (88) | (24) | (778) |
| Net transfers | — | — | 16 | — | — | 34 | (15) | (35) | — |
| Market appreciation / (depreciation) | 993 | 996 | 80 | 130 | 283 | 90 | 199 | 28 | 2,801 |
| Ending AUM | $23,388 | $14,833 | $7,777 | $4,806 | $3,735 | $2,625 | $1,517 | $314 | $58,997 |

34

*(in millions)*

| Nine Months Ended September 30, 2018 | U.S. Mid Cap Equity | U.S. Small Cap Equity | Fixed Income | U.S. Large Cap Equity | Global / Non-U.S. Equity | Solutions | Commodity | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Beginning AUM | $25,185 | $15,308 | $7,551 | $4,789 | $4,105 | $3,028 | $1,419 | $386 | $61,771 |
| Gross client cash inflows | 3,292 | 2,383 | 1,145 | 200 | 1,420 | 1,307 | 200 | 155 | 10,102 |
| Gross client cash outflows | (5,162) | (2,527) | (1,637) | (677) | (594) | (307) | (517) | (89) | (11,510) |
| Net client cash flows | (1,870) | (144) | (492) | (477) | 826 | 1,000 | (317) | 66 | (1,408) |
| Net transfers | 19 | (19) | 1 | 12 | (8) | 40 | — | (53) | (8) |
| Market appreciation / (depreciation) | 1,680 | 1,293 | 89 | 320 | (185) | 156 | (136) | 68 | 3,285 |
| Ending AUM | $25,014 | $16,438 | $7,149 | $4,644 | $4,738 | $4,224 | $966 | $467 | $63,640 |
| **Nine Months Ended September 30, 2017** |  |  |  |  |  |  |  |  |  |
| Beginning AUM(1) | $20,083 | $14,090 | $7,726 | $5,921 | $3,460 | $1,602 | $1,882 | $202 | $54,965 |
| Gross client cash inflows | 6,287 | 2,897 | 1,375 | 173 | 558 | 978 | 234 | 56 | 12,558 |
| Gross client cash outflows | (5,480) | (3,849) | (1,586) | (1,419) | (1,123) | (161) | (624) | (81) | (14,323) |
| Net client cash flows | 807 | (952) | (211) | (1,246) | (565) | 817 | (390) | (25) | (1,765) |
| Net transfers | 1 | — | (57) | (6) | — | — | — | 62 | — |
| Market appreciation / (depreciation) | 2,497 | 1,695 | 319 | 137 | 840 | 206 | 25 | 75 | 5,796 |
| Ending AUM | $23,388 | $14,833 | $7,777 | $4,806 | $3,735 | $2,625 | $1,517 | $314 | $58,997 |

(1) Reflects transfer of $27.0 million in assets from Other to Solutions effective January 1, 2017.

We made the strategic decision to exit the Diversified Equity Franchise (“Diversified”) and move the remaining AUM into our Munder Franchise, which was completed as of May 15, 2017. The following table presents the impact of Diversified on net client cash flows for the periods indicated. Given this decision, we believe this presentation is a better representation of our business.

*(in millions)*

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net client cash flows—Total Company | $(672) | $(778) | $(1,408) | $(1,765) |
| Net client cash flows—Diversified | — | — | — | (618) |
| Net client cash flows—Total Company excluding Diversified | $(672) | $(778) | $(1,408) | $(1,146) |

The following table presents our AUM by distribution channel as of the dates indicated:

*(in millions)*

|  | As of September 30, 2018 Amount | % of total | 2017 Amount | % of total |
| --- | ---: | ---: | ---: | ---: |
| Institutional | $35,138 | 55% | $33,371 | 57% |
| Retail | 28,502 | 45% | 25,626 | 43% |
| Total AUM(1) | $63,640 | 100% | $58,997 | 100% |

(1) The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment.

The following table summarizes our asset flows by vehicle for the periods indicated:

*(in millions)*

| Three Months Ended September 30, 2018 | Mutual Funds(1) | ETFs | Separate Accounts and Other Vehicles(2) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $37,818 | $2,906 | $21,532 | $62,256 |
| Gross client cash inflows | 2,098 | 305 | 493 | 2,896 |
| Gross client cash outflows | (2,950) | (18) | (600) | (3,568) |
| Net client cash flows | (852) | 287 | (107) | (672) |
| Net transfers | — | — | — | — |
| Market appreciation / (depreciation) | 1,223 | 102 | 731 | 2,056 |
| Ending AUM | $38,189 | $3,295 | $22,156 | $63,640 |
| **Three Months Ended September 30, 2017** |  |  |  |  |
| Beginning AUM | $36,133 | $1,578 | $19,262 | $56,973 |
| Gross client cash inflows | 2,759 | 237 | 883 | 3,879 |
| Gross client cash outflows | (3,479) | (2) | (1,176) | (4,657) |
| Net client cash flows | (720) | 235 | (293) | (778) |
| Net transfers | — | — | — | — |
| Market appreciation / (depreciation) | 1,928 | 62 | 811 | 2,801 |
| Ending AUM | $37,341 | $1,875 | $19,780 | $58,997 |

*(in millions)*

| Nine Months Ended September 30, 2018 | Mutual Funds(1) | ETFs | Separate Accounts and Other Vehicles(2) | Total |
| --- | ---: | ---: | ---: | ---: |
| Beginning AUM | $37,967 | $2,250 | $21,555 | $61,771 |
| Gross client cash inflows | 7,279 | 1,082 | 1,741 | 10,102 |
| Gross client cash outflows | (8,924) | (143) | (2,443) | (11,510) |
| Net client cash flows | (1,645) | 939 | (702) | (1,408) |
| Net transfers | (11) | — | 3 | (8) |
| Market appreciation / (depreciation) | 1,878 | 106 | 1,301 | 3,285 |
| Ending AUM | $38,189 | $3,295 | $22,156 | $63,640 |
| **Nine Months Ended September 30, 2017** |  |  |  |  |
| Beginning AUM | $33,975 | $906 | $20,085 | $54,965 |
| Gross client cash inflows | 9,658 | 833 | 2,067 | 12,558 |
| Gross client cash outflows | (10,138) | (4) | (4,181) | (14,323) |
| Net client cash flows | (480) | 829 | (2,114) | (1,765) |
| Net transfers | (5) | — | 5 | — |
| Market appreciation / (depreciation) | 3,851 | 140 | 1,805 | 5,796 |
| Ending AUM | $37,341 | $1,875 | $19,780 | $58,997 |

(1) Includes institutional and retail share classes and Variable Insurance Products or VIP funds.

(2) Includes collective trust funds, wrap program separate accounts and unified managed accounts or UMAs.

At September 30, 2018, our total AUM was $63.6 billion, an increase of $1.3 billion, or 2% compared to $62.3 billion at June 30, 2018. The increase in AUM reflects net market appreciation of $2.1 billion and net outflows of ($0.7) billion. The net outflows were primarily a result of ($0.7) billion in our U.S. mid cap equity strategies, ($0.2) billion in our commodity strategies, ($0.1) billion in our U.S. large cap equity strategies and ($0.1) billion in our U.S. small cap equity strategies partially offset by $0.3 billion in Solutions, $0.1 billion in our fixed income strategies and $0.1 billion in our global / non-U.S. equity strategies.

At September 30, 2018, our total AUM was $63.6 billion, an increase of $1.8 billion, or 3% compared to $61.8 billion at December 31, 2017. The increase in AUM was primarily due to net market appreciation of $3.3 billion and net outflows of ($1.4) billion. The net outflows were primarily a result of ($1.9) billion in our U.S. mid cap equity strategies, ($0.5) billion in our U.S. large cap equity strategies, ($0.5) billion in our fixed income strategies, ($0.3) billion in our commodity strategies and ($0.1) billion in our U.S. small cap equity strategies partially offset by $1.0 billion in Solutions and $0.8 billion in our global / non-U.S. equity strategies.

### GAAP Results of Operations

Our GAAP results of operations were as follows for the three months ended September 30, 2018 and 2017.

*(in thousands, except for shares)*

| Revenue | Three Months Ended September 30, 2018 | 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Investment management fees | $92,525 | $86,016 | $6,509 | 8% |
| Fund administration and distribution fees | 15,557 | 16,372 | (815) | -5% |
| **Total revenue** | **108,082** | **102,388** | **5,694** | **6%** |
| **Expenses** |  |  |  |  |
| Personnel compensation and benefits | $38,027 | $36,097 | $1,930 | 5% |
| Distribution and other asset-based expenses | 24,269 | 24,801 | (532) | -2% |
| General and administrative | 6,951 | 8,867 | (1,916) | -22% |
| Depreciation and amortization | 5,574 | 7,055 | (1,481) | -21% |
| Acquisition-related costs | 1,451 | 844 | 607 | 72% |
| Restructuring and integration costs | — | 483 | (483) | n/m% |
| **Total operating expenses** | **76,272** | **78,147** | **(1,875)** | **-2%** |
| **Income from operations** | **31,810** | **24,241** | **7,569** | 31% |
| **Other income (expense)** |  |  |  |  |
| Interest income and other income/(expense) | $(200) | $753 | $(953) | -127% |
| Interest expense and other financing costs | (4,458) | (11,688) | 7,230 | 62% |
| Loss on debt extinguishment | — | (330) | 330 | n/m |
| **Total other income (expense), net** | **(4,658)** | **(11,265)** | **6,607** | **59%** |
| **Income before income taxes** | **27,152** | **12,976** | **14,176** | **109%** |
| **Income tax expense** | **(6,562)** | **(5,126)** | **(1,436)** | **-28%** |
| **Net income** | **$20,590** | **$7,850** | **$12,740** | **162%** |
| **Earnings per share of common stock** |  |  |  |  |
| Basic | $0.30 | $0.14 | $0.16 | 112% |
| Diluted | $0.29 | $0.13 | $0.16 | 118% |
| **Weighted average number of shares outstanding** |  |  |  |  |
| Basic | 67,972,313 | 54,961,161 | 13,011,152 | 24% |
| Diluted | 71,863,566 | 59,738,176 | 12,125,390 | 20% |
| **Dividends declared per share of common stock** | $— | $— | $— | — |

37

#### Investment Management Fees

Investment management fees are earned from managing clients’ assets and are based on our overall weighted average fee rate charged to our clients and our level of AUM. Investment management fees increased by $6.5 million, or 8%, to $92.5 million for the three months ended September 30, 2018, from $86.0 million for the three months ended September 30, 2017 due to an increase in average AUM year over year partially offset by a decrease in the realized fee rate due to asset mix. Average AUM increased by $5.5 billion to $63.4 billion for the three months ended September 30, 2018 from $57.9 billion for the three months ended September 30, 2017.

#### Fund Administration and Distribution Fees

Fund administration and distribution fees are asset-based fees earned from open-end mutual funds and ETFs for administration and distribution services. Fund administration and distribution fees totaled $15.6 million for the three months ended September 30, 2018, a decrease of $0.8 million, or 5%, when compared to the three months ended September 30, 2017 due to a decrease in fund distribution fees partially offset by an increase in fund administration fees.

Fund distribution fees are asset-based fees earned from open-end mutual funds for distribution services. Fund distribution fees fluctuate based on the level of average open-end mutual fund AUM and the composition of those assets across share classes that pay varying levels of fund distribution fees. Fund distribution fees were $9.4 million for the three months ended September 30, 2018, compared to $10.7 million for the three months ended September 30, 2017. While mutual fund daily average AUM grew by $1.8 billion from $36.5 billion for the three months ended September 30, 2017 to $38.3 billion for the three months ended September 30, 2018, the mix of assets shifted to lower 12b-1 paying share classes.

Fund administration fees are asset-based fees earned from open-end funds for administration services. Fund administration fees fluctuate based on the level of average open-end fund AUM and the fee rates charged for these services. Fund administration fees were $6.2 million for the three months ended September 30, 2018, compared to $5.7 million for the three months ended September 30, 2017 due to higher mutual fund and ETF average daily assets.

#### Personnel Compensation and Benefits

Personnel compensation and benefits is our most significant category of expense. Personnel compensation and benefits consists of (i) salaries, payroll related taxes and employee benefits, (ii) incentive compensation, (iii) sales-based compensation, (iv) compensation expense related to equity awards granted to employees and (v) acquisition and transaction-related compensation. The following table presents the components of GAAP personnel compensation and benefits expense for the three months ended September 30, 2018 and 2017:

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Salaries, payroll related taxes and employee benefits | $11,928 | $11,952 |
| Incentive compensation | 18,580 | 16,871 |
| Sales-based compensation(1) | 3,514 | 3,382 |
| Equity awards granted to employees(2) | 4,005 | 4,060 |
| Acquisition-related cash retention compensation | — | (168) |
| **Total compensation and benefits expense** | **$38,027** | **$36,097** |

(1) Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales.

(2) Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards are recognized as compensation expense over the vesting period.

Personnel compensation and benefits was $38.0 million for the three months ended September 30, 2018, up $1.9 million, or 5%, from $36.1 million for the three months ended September 30, 2017, primarily due to increased incentive compensation resulting from higher pre-incentive compensation earnings.

#### Distribution and Other Asset‑based Expenses

Distribution and other asset-based expenses consists of (i) broker-dealer distribution fees and platform distribution fees, (ii) fund expense reimbursements to affiliates and (iii) sub-administration, sub-advisory and middle-office expenses. The following table presents the components of distribution and other asset-based expenses for the three months ended September 30, 2018 and 2017:

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Broker-dealer distribution fees | $8,689 | $9,986 |
| Platform distribution fees | 7,228 | 7,306 |
| Fund expense reimbursements | 3,072 | 2,216 |
| Sub-administration | 1,850 | 1,480 |
| Sub-advisory | 1,595 | 2,049 |
| Middle-office | 1,835 | 1,764 |
| **Total distribution and other asset-based expenses** | **$24,269** | **$24,801** |

Distribution and other asset-based expenses are primarily based on AUM. Distribution and other asset-based expenses were $24.3 million for the three months ended September 30, 2018, a decrease of $0.5 million, or 2%, from $24.8 million for the three months ended September 30, 2017. Asset-based expenses associated with sub-administration, fund expense reimbursements and middle office have increased year over year due to the increase in AUM. Broker-dealer distribution fees and platform distribution fees decreased due to the mix of mutual fund assets and share classes. The decrease in sub-advisory expense is a result of a decline in the assets included under our two sub-advisory relationships.

#### General and Administrative Expenses

General and administrative expenses primarily consist of investment research and technology costs, professional and marketing fees, travel, rent, insurance and other general operating expenses. General and administrative expenses decreased by $1.9 million, or 21%, to $7.0 million for the three months ended September 30, 2018, from $8.9 million for the three months ended September 30, 2017. Included in general and administrative expenses for the three months ended September 30, 2017 was $1.2 million of costs associated with the repricing of the Company’s term loans. Occupancy and other business expenses decreased year over year due to operational efficiencies.

#### Depreciation and Amortization

Depreciation and amortization expense consists primarily of the depreciation of property and equipment as well as the amortization of acquired intangibles that have a definite life. Depreciation and amortization decreased by $1.5 million, or 21%, to $5.6 million for the three months ended September 30, 2018, from $7.1 million for the three months ended September 30, 2017, primarily due to lower amortization as certain intangible assets acquired in connection with the management-led buyout with Crestview GP reached the end of their useful lives.

#### Acquisition‑Related Costs

Acquisition-related costs include legal fees, advisory services, mutual fund proxy voting costs and other one-time expenses related to acquisitions. Acquisition-related costs increased $0.6 million or 72%, to $1.4 million for the three months ended September 30, 2018, from $0.8 million for the three months ended September 30, 2017 due mainly to costs related to the Harvest Acquisition.

#### Restructuring and Integration Costs

Restructuring and integration costs include costs incurred in connection with business combinations, asset purchases and changes in business strategy. Restructuring and integration costs totaled $0.5 million for the three months ended September 30, 2017, due to costs incurred in the third quarter of 2017 for asset write-offs and other one-time costs. There were no restructuring and integration costs for the three months ended September 30, 2018.

#### Interest Income and Other Income/(Expense)

Interest income and other income/(expense) includes interest and dividend income, realized gains and losses on investments, unrealized gains and losses on trading securities, losses from equity-method investments and loss on other receivable. Interest income and other income/(expense) decreased by $1.0 million, or 127%, to $0.2 million of net expense for the three months ended September 30, 2018, from $0.8 million of net income for the three months ended September 30, 2017, The change was mainly due to market action on trading securities, losses from equity method investments and loss on other receivable.

#### Interest Expense and Other Financing Costs

Interest expense and other financing costs consists primarily of interest expense attributable to long-term debt. Interest expense and other financing costs decreased by $7.2 million, or 62%, to $4.5 million for the three months ended September 30, 2018, from $11.7 million for the three months ended September 30, 2017 as a result of refinancing activities and debt pre-payment. See Note 8 to the unaudited condensed consolidated financial statements for further discussion.

#### Loss on Debt Extinguishment

Loss on debt extinguishment consists of the write-off of previously capitalized debt-related costs upon the termination of the debt. During the three months ended September 30, 2018, the Company recognized no loss on debt extinguishment. During the three months ended September 30, 2017, the Company recognized a $0.3 million loss on debt extinguishment related to the repricing of its term loan.

#### Income Tax Expense

The provision for income taxes for the three months ended September 30, 2018 and 2017 comprises U.S. federal, state and local taxes and foreign income taxes payable by certain of our subsidiaries. The difference between our effective tax rate and the statutory federal rate of 21% are state, local and foreign income taxes and non-deductible expenses.

On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Effective January 1, 2018, we estimate the impact of the Tax Act lowered our combined statutory federal, state, local and foreign income tax rate from approximately 38% to approximately 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our combined statutory federal, state, local and foreign income tax rate also reduces the tax benefit resulting from the tax deduction of goodwill and acquired intangible assets beginning in 2018.

Our GAAP results of operations were as follows for the nine months ended September 30, 2018 and 2017.

*(in thousands, except for shares)*

| Revenue | Nine Months Ended September 30, 2018 | 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Investment management fees | $270,653 | $254,605 | $16,048 | 6% |
| Fund administration and distribution fees | 46,792 | 49,378 | (2,586) | -5% |
| **Total revenue** | **317,445** | **303,983** | **13,462** | **4%** |
| **Expenses** |  |  |  |  |
| Personnel compensation and benefits | 111,970 | 106,772 | 5,198 | 5% |
| Distribution and other asset-based expenses | 73,557 | 78,226 | (4,669) | -6% |
| General and administrative | 23,095 | 26,049 | (2,954) | -11% |
| Depreciation and amortization | 17,917 | 23,340 | (5,423) | -23% |
| Change in value of consideration payable for acquisition of business | (4) | (25) | 21 | 84% |
| Acquisition-related costs | 1,446 | 1,435 | 11 | 1% |
| Restructuring and integration costs | 702 | 4,944 | (4,242) | -86% |
| **Total operating expenses** | **228,683** | **240,741** | **(12,058)** | **-5%** |
| **Income from operations** | **88,762** | **63,242** | **25,520** | **40%** |
| **Other income (expense)** |  |  |  |  |
| Interest income and other income/(expense) | (229) | (816) | 587 | 72% |
| Interest expense and other financing costs | (16,256) | (38,159) | 21,903 | 57% |
| Loss on debt extinguishment | (6,058) | (330) | (5,728) | n/m |
| **Total other income (expense), net** | **(22,543)** | **(39,305)** | **16,762** | **43%** |
| **Income before income taxes** | **66,219** | **23,937** | **42,282** | **177%** |
| **Income tax expense** | **(16,430)** | **(9,320)** | **(7,110)** | **-76%** |
| **Net income** | **$49,789** | **$14,617** | **$35,172** | **241%** |
| **Earnings per share of common stock** |  |  |  |  |
| Basic | $0.76 | $0.27 | $0.49 | 184% |
| Diluted | $0.71 | $0.25 | $0.46 | 189% |
| **Weighted average number of shares outstanding** |  |  |  |  |
| Basic | 65,816,557 | 54,867,257 | 10,949,300 | 20% |
| Diluted | 70,168,116 | 59,517,606 | 10,650,510 | 18% |
| **Dividends declared per share of common stock** | $— | $2.19 | $(2.19) | n/m |

#### Investment Management Fees

Investment management fees increased by $16.1 million, or 6%, to $270.7 million for the nine months ended September 30, 2018 from $254.6 million for the nine months ended September 30, 2017 due to an increase in average AUM year over year partially offset by a decrease in the realized fee rate due to asset mix. Average AUM increased by $5.4 billion to $62.4 billion for the nine months ended September 30, 2018 from $57.0 billion for the nine months ended September 30, 2017.

#### Fund Administration and Distribution Fees

Fund administration and distribution fees totaled $46.8 million for the nine months ended September 30, 2018, a decrease of $2.6 million, or 5%, when compared to the nine months ended September 30, 2017 due to a decrease in fund distribution fees partially offset by an increase in fund administration fees.

Fund distribution fees were $29.1 million for the nine months ended September 30, 2018, compared to $32.9 million for the nine months ended September 30, 2017. While mutual fund daily average AUM grew by $2.3 billion from $35.7 billion for the nine months ended September 30, 2017 to $38.0 billion for the nine months ended September 30, 2018, the mix of assets shifted to lower 12b-1 paying share classes.

Fund administration fees were $17.7 million for the nine months ended September 30, 2018, compared to $16.5 million for the nine months ended September 30, 2017 due to the assumption of administration responsibilities for VictoryShares in March 2017 and higher mutual fund and ETF average daily assets.

#### Personnel Compensation and Benefits

The following table presents the components of GAAP personnel compensation and benefits expense for the nine months ended September 30, 2018 and 2017:

*(in thousands)*

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Salaries, payroll related taxes and employee benefits | $37,104 | $37,638 |
| Incentive compensation | 53,237 | 46,962 |
| Sales-based compensation(1) | 10,334 | 12,102 |
| Equity awards granted to employees(2) | 11,295 | 10,012 |
| Acquisition and transaction-related compensation | — | 58 |
| **Total personnel compensation and benefits expense** | **$111,970** | **$106,772** |

(1) Represents sales-based commissions paid to our distribution teams. Sales-based compensation varies based on gross client cash flows and revenue earned on sales.

(2) Equity awards typically vest over several years based on service and the achievement of specific business and financial targets. The value of the equity awards are recognized as compensation expense over the vesting period.

Personnel compensation and benefits was $112.0 million for the nine months ended September 30, 2018, an increase of $5.2 million, or 5%, from $106.8 million for the nine months ended September 30, 2017. Salaries and benefits was $37.1 million for the nine months ended September 30, 2018, a decrease of $0.5 million, or 1%, from $37.6 million for the nine months ended September 30, 2017. This decrease reflects the reduction in headcount that resulted from the integration of RS Investments onto our operations and technology platform in the first quarter of 2017. Incentive compensation was $53.2 million for the nine months ended September 30, 2018, an increase of $6.2 million, or 13%, from $47.0 million for the nine months ended September 30, 2017, due to higher pre-incentive compensation earnings. Sales-based compensation was $10.3 million for the nine months ended September 30, 2018, a decrease of $1.8 million, or 15%, from $12.1 million for the nine months ended September 30, 2017, as a result of lower gross flows. Equity award expense was $11.3 million for the nine months ended September 30, 2018, an increase of $1.3 million, or 13%, from $10.0 million for the nine months ended September 30, 2017, due to the equity awards granted on January 1, 2018 and pre-existing awards that are still being expensed. There was no acquisition and transaction-related compensation during the nine months ended September 30, 2018.

#### Distribution and Other Asset‑based Expenses

The following table presents the components of distribution and other asset-based expenses for the nine months ended September 30, 2018 and 2017:

*(in thousands)*

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Broker-dealer distribution fees | $26,832 | $30,590 |
| Platform distribution fees | 21,781 | 21,961 |
| Fund expense reimbursements | 9,352 | 9,826 |
| Sub-administration | 5,019 | 4,219 |
| Sub-advisory | 5,235 | 6,312 |
| Middle-office | 5,338 | 5,318 |
| **Total distribution and other asset-based expenses** | **$73,557** | **$78,226** |

Distribution and other asset-based expenses are primarily based on AUM. Distribution and other asset-based expenses were $73.6 million for the nine months ended September 30, 2018, a decrease of $4.6 million, or 6%, from $78.2 million for the nine months ended September 30, 2017. Asset-based expenses associated with sub-administration and middle-office have increased year over year due to the increase in AUM. Broker-dealer distribution fees and platform distribution fees decreased due to the mix of mutual fund assets and share classes. Fund expense reimbursements have decreased year over year due to operational efficiencies. The decrease in sub-advisory expense is a result of a decline in the assets included under our two sub-advisory relationships.

#### General and Administrative Expenses

General and administrative expenses decreased by $2.9 million, or 11%, to $23.1 million for the nine months ended September 30, 2018, from $26.0 million for the nine months ended September 30, 2017. The decrease was due to operational efficiencies.

#### Depreciation and Amortization

Depreciation and amortization decreased by $5.4 million, or 23%, to $17.9 million for the nine months ended September 30, 2018, from $23.3 million for the nine months ended September 30, 2017, primarily due to lower amortization as certain intangible assets acquired in connection with the management-led buyout with Crestview GP reached the end of their useful lives.

#### Acquisition‑Related Costs

Acquisition costs for the nine months ended September 30, 2018 were relatively flat compared to the nine months ended September 30, 2017.

#### Restructuring and Integration Costs

Restructuring and integration costs decreased by $4.2 million to $0.7 million for the nine months ended September 30, 2018, from $4.9 million for the nine months ended September 30, 2017, due to costs incurred in the first half of 2017 for contract breakage and asset write-offs associated with the integration of RS Investments.

#### Interest Income and Other Income/(Expense)

The net expense recorded in interest income and other income/(expense) decreased by $0.6 million, or 72%, to net expense of $0.2 million for the nine months ended September 30, 2018, from net expense of $0.8 million for the nine months ended September 30, 2017 due to a lower loss on other receivable partially offset by increased losses from equity method investments and lower unrealized gains on trading securities.

#### Interest Expense and Other Financing Costs

Interest expense and other financing costs decreased by $21.9 million, or 57%, to $16.3 million for the nine months ended September 30, 2018, from $38.2 million for the nine months ended September 30, 2017 as a result of refinancing activities and debt pre-payment. See Note 8 to the unaudited condensed consolidated financial statements for further discussion.

#### Loss on Debt Extinguishment

During the nine months ended September 30, 2018, the Company recognized a $6.1 million loss on debt extinguishment consisting of $4.2 million of debt issuance costs and $1.9 million of debt discount upon the termination of the 2014 Credit Agreement. See Note 8 to the unaudited condensed consolidated financial statements for further discussion.

#### Income Tax Expense

The provision for income taxes for the nine months ended September 30, 2018 and 2017 comprises U.S. federal, state and local taxes and foreign income taxes payable by certain of our subsidiaries. The difference between our effective tax rate and the statutory federal rate of 21% are state, local and foreign income taxes and non-deductible expenses.

On December 22, 2017, the Tax Act was enacted. The Tax Act significantly revised the U.S. corporate income tax law by, among other things, decreasing the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Effective January 1, 2018, we estimate the impact of the Tax Act lowered our combined statutory federal, state, local and foreign income tax rate from approximately 38% to approximately 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our combined statutory federal, state, local and foreign income tax rate also reduces the tax benefit resulting from the tax deduction of goodwill and acquired intangible assets beginning in 2018.

### Supplemental Non‑GAAP Financial Information

We use non-GAAP performance measures to evaluate the underlying operations of our business. Due to our acquisitive nature, there are a number of acquisition and restructuring related expenses included in GAAP measures that we believe distort the economic value of our organization and we believe that many investors use this information when assessing the financial performance of companies in the investment management industry. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to assess the operating performance of our Company. The non-GAAP measures we report are Adjusted EBITDA and Adjusted Net Income.

The following table sets forth a reconciliation from GAAP financial measures to non-GAAP measures for the periods indicated:

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$20,590** | **$7,850** | **$49,789** | **$14,617** |
| Income tax expense | (6,562) | (5,126) | (16,430) | (9,320) |
| **Income before taxes** | **$27,152** | **$12,976** | **$66,219** | **$23,937** |
| Interest expense(1) | 4,053 | 10,648 | 16,376 | 35,002 |
| Depreciation(2) | 775 | 858 | 2,247 | 2,666 |
| Other business taxes(3) | 350 | 619 | 1,168 | 1,459 |
| Amortization of acquisition-related intangibles(4) | 4,799 | 6,197 | 15,670 | 20,673 |
| Stock-based compensation(5) | 4,005 | 4,060 | 11,295 | 10,012 |
| Acquisition, restructuring and exit costs(6) | 1,647 | 1,241 | 2,725 | 9,040 |
| Debt issuance costs(7) | 373 | 2,419 | 7,436 | 5,247 |
| Pre-IPO governance expenses(8) | — | 301 | 138 | 901 |
| Losses on equity method investments(9) | 167 | (65) | 506 | 108 |
| **Adjusted EBITDA** | **$43,321** | **$39,254** | **$123,780** | **$109,045** |

*(in thousands)*

| Reconciliation of non-GAAP financial measures: | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | **$20,590** | **$7,850** | **$49,789** | **$14,617** |
| Adjustments to reflect the operating performance of the Company: |  |  |  |  |
| i. Other business taxes(3) | 350 | 619 | 1,168 | 1,459 |
| ii. Amortization of acquisition-related intangibles(4) | 4,799 | 6,197 | 15,670 | 20,673 |
| iii. Stock-based compensation(5) | 4,005 | 4,060 | 11,295 | 10,012 |
| iv. Acquisition, restructuring and exit costs(6) | 1,647 | 1,241 | 2,725 | 9,040 |
| v. Debt issuance costs(7) | 373 | 2,419 | 7,436 | 5,247 |
| vi. Pre-IPO governance expenses(8) | — | 301 | 138 | 901 |
| Tax effect of above adjustments(10) | (2,794) | (5,638) | (9,608) | (17,986) |
| **Adjusted Net Income** | **$28,970** | **$17,049** | **$78,613** | **$43,963** |
| Tax benefit of goodwill and acquired intangibles(11) | $3,318 | $4,901 | $9,958 | $14,561 |

(1) We add back interest paid on debt and other financing costs, net of interest income; interest expense is included in “Interest expense and other financing costs” and the write-off of debt discount is shown in “Loss on debt extinguishment” in our unaudited condensed consolidated financial statements, while interest income is shown in “Interest income and other income/(expense)” in our unaudited condensed consolidated financial statements.

(2) We add back depreciation on property and equipment; included in “Depreciation and amortization” in our unaudited condensed consolidated financial statements.

(3) We add back other business taxes; other business taxes are included in “General and administrative” in our unaudited condensed consolidated financial statements.

(4) We add back amortization of acquisition‑related intangibles; included in “Depreciation and amortization” in our unaudited condensed consolidated financial statements.

(5) We add back the expense associated with stock‑based compensation associated with equity issued from pools that were created in connection with the management‑led buyout with Crestview GP from KeyCorp, the Munder

Acquisition and the RS Acquisition and as a result of IPO‑related equity grants; included in “Personnel compensation and benefits” in our unaudited condensed consolidated financial statements.

(6) We add back direct incremental costs of acquisitions and the IPO, including expenses associated with third‑party advisors, proxy solicitations of mutual fund shareholders for transaction consents, vendor contract early termination costs, loss on other receivable recorded in connection with an acquisition, and severance, retention and transaction incentive compensation. Severance, retention and transaction incentive compensation is included in “Personnel compensation and benefits” in our unaudited condensed consolidated financial statements, loss on other receivable recorded in connection with an acquisition is included in “Interest income and other income/(expense),” costs associated with professional services incurred in connection with IPO readiness are included in “General and administrative”; all other incremental costs are included in “Restructuring and integration costs” or “Acquisition‑related costs.”

*(in thousands)*

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Restructuring and integration costs | $— | $483 | $702 | $4,944 |
| Interest income and other income/(expense) | 196 | — | 310 | 2,011 |
| General and administrative | — | 81 | 267 | 592 |
| Acquisition-related costs | 1,451 | 844 | 1,446 | 1,435 |
| Personnel compensation and benefits | — | (167) | — | 58 |
| **Total acquisition, restructuring and exit costs** | **$1,647** | **$1,241** | **$2,725** | **$9,040** |

(7) We add back debt issuance costs; included in “Interest expense and other financing costs”, “General and administrative” and “Loss on debt extinguishment” in our unaudited condensed consolidated financial statements. See “—Liquidity and Capital Resources” for more information.

(8) We add back pre‑IPO governance expenses paid to Crestview and Reverence Capital, included in “General and administrative” in our unaudited condensed consolidated financial statements. These payments terminated as of the completion of the IPO.

(9) We adjust for earnings/losses on equity method investments, included in “Interest income and other income/(expense)” in our unaudited condensed consolidated financial statements.

(10) For the three and nine months ended September 30, 2018, reflects income taxes of 25% applied to the sum of line items i. to vi.; 25% represents statutory federal income tax rate of 21% plus an estimate for state, local and foreign income taxes. For the three and nine months ended September 30, 2017, reflects income taxes of 38% applied to the sum of line items i. to vi.; 38% represents statutory federal income tax rate of 35% plus an estimate for state, local and foreign income taxes.

(11) Represents the tax benefits associated with deductions allowed for intangibles and goodwill generated from prior acquisitions in which we received a step-up in basis for tax purposes. Acquired intangible assets and goodwill may be amortized for tax purposes, generally over a 15-year period. The tax benefit from amortization on these assets is included to show the full economic benefit of deductions for all acquired intangibles with a step-up in tax basis. Due to our acquisitive nature, tax deductions allowed on acquired intangible assets and goodwill provide us with a significant supplemental economic benefit.

Effective January 1, 2018, we estimate the impact of the Tax Act lowered our combined statutory federal, state, local and foreign income tax rate from approximately 38% to approximately 25% thus lowering our income tax expense beginning in calendar year 2018. The reduction in our combined statutory federal, state, local and foreign income tax rate also reduces the tax benefit resulting from the tax deduction of goodwill and acquired intangible assets beginning in 2018.

Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures at other companies, even if similar terms are used to identify these measures.

### Liquidity and Capital Resources

Our primary uses of cash relate to repayment of our debt obligations and funding working capital needs and are expected to be met primarily through cash generated from our operations. The following table shows our liquidity position as of September 30, 2018 and December 31, 2017.

*(in thousands)*

|  | September 30, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| Cash and cash equivalents | $25,139 | $12,921 |
| Accounts and other receivables | 50,421 | 55,917 |
| Undrawn commitment on revolving credit facility | 100,000 | 25,000 |
| Accounts and other payables | (47,180) | (51,301) |

We manage our cash balances in order to fund our day-to-day operations. Our accounts receivable consist primarily of investment management fees that have been earned but not yet received from clients. Included in other receivables are amounts due under a contract with a third party acquired in connection with the RS Acquisition, income and other taxes receivable and amounts receivable from the funds. We perform a review of our receivables on a monthly basis to access collectability.

We maintained a $100.0 million revolving credit facility at September 30, 2018, which had $100.0 million undrawn as of September 30, 2018. We maintained a $25.0 million revolving credit facility at December 31, 2017 which had $25.0 million undrawn as of December 31, 2017. See Note 8 to the unaudited condensed consolidated financial statements for further discussion.

#### Debt Refinancing

On February 12, 2018, concurrently with the closing of the IPO, we entered into the Existing Credit Agreement under which we received seven-year term loans in an original aggregate principal amount of $360.0 million and established a five-year revolving credit facility (which was unfunded as of closing) with aggregate commitments of $50.0 million. On May 3, 2018, the Company signed an amendment to the Existing Credit Agreement increasing the revolving credit facility from $50.0 million to $100.0 million. See Note 8 to the unaudited condensed consolidated financial statements for further discussion.

The company repaid $20.0 million of the outstanding term loans under the Existing Credit Agreement in the three months ended September 30, 2018. A total of $80.0 million of the outstanding term loans under the Existing Credit Agreement has been repaid in the period from February 12, 2018 to September 30, 2018. See Note 8 to the unaudited condensed consolidated financial statements for further discussion.

#### The Harvest Commitment Letter

In connection with entering into the Harvest Purchase Agreement, the Company entered into the Harvest Commitment Letter pursuant to which Royal Bank of Canada and Barclays Bank PLC committed to provide, and agreed to arrange and syndicate, the Harvest Facility. The proceeds of the Harvest Facility, together with cash on the Company’s balance sheet at the time of the Harvest Closing, will be used by the Company to fund a portion of the Harvest Purchase Price and to pay fees and expenses incurred in connection with the Harvest Acquisition and the Harvest Facility. The availability of the Harvest Facility is subject to the satisfaction of certain customary conditions precedent. Neither the closing of the Harvest Facility, nor the receipt of any other financing, is a condition to the closing of the Harvest Acquisition.

#### USAA AMCO Credit Facilities Commitment Letter

In connection with entering into the USAA Stock Purchase Agreement, on November 6, 2018 the Company entered into a commitment letter (the “USAA AMCO Credit Facilities Commitment Letter”) with Barclays Bank PLC (“Barclays”) and Royal Bank of Canada (“RBC”, and together with Barclays, the “Financing Sources”), pursuant to which the Financing Sources have committed to provide, and have agreed to arrange and syndicate, a new seven-year senior secured first lien term loan facility (the “USAA AMCO Term Loan Facility”) in an aggregate principal amount of up to $1.395 billion and a new five-year senior secured first lien revolving credit facility (together with the USAA AMCO Term Loan Facility, the “USAA AMCO Credit Facilities”) in an aggregate principal amount of up to $100 million.

Proceeds from the USAA AMCO Term Loan Facility will be used to (a) refinance in full all debt outstanding under the Existing Credit Agreement; (b) finance the USAA AMCO Acquisition and the payment of any fees, commissions and expenses in connection therewith and (c) finance the previously-announced Harvest Acquisition and the payment of any fees, commissions and expenses in connection therewith. In the event that the Harvest Acquisition has been previously financed with “Incremental Term Loans” incurred pursuant to the Existing Credit Agreement, the USAA AMCO Term Loan Facility will also be used to refinance such “Incremental Term Loans”. The availability of the USAA AMCO Credit Facilities is subject to the satisfaction of certain customary conditions. Neither the closing of the USAA AMCO Credit Facilities, nor the receipt of any other financing, is a condition to the closing of the USAA AMCO Acquisition.

#### Capital Requirements

VCA is a registered broker-dealer subject to the Uniform Net Capital requirements under the Exchange Act, which requires maintenance of certain minimum net capital levels. In addition, we have certain non-U.S. subsidiaries that have minimum capital requirements. As a result, such subsidiaries of our Company may be restricted in their ability to transfer cash to their parents.

#### Cash Flows for the nine months ended September 30, 2018 and 2017

*(in thousands)*

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $99,897 | $59,410 |
| Net cash used in investing activities | (7,655) | (5,093) |
| Net cash used in financing activities | (79,968) | (59,326) |

Operating activities provided net cash of $99.9 million and $59.4 million for the nine months ended September 30, 2018 and 2017, respectively. The $40.5 million increase in net cash provided by operating activities was primarily due to growth in the business and lower interest expense as a result of refinancing activities and pre-payments.

Investing activities consist primarily of purchases and sales of property and equipment, the purchases and sales of trading securities related to our deferred compensation plan and other investing activities related to our business operations. Investing activities used net cash of $7.7 million and $5.1 million for the nine months ended September 30, 2018 and 2017, respectively. The $2.6 million increase in the net cash used in investing activities was primarily due to additional equity investments made in Cerebellum Capital during the nine months ended September 30, 2018.

Financing activities consist primarily of proceeds received or paid from the issuance or repurchase of equity, debt-related activity and dividend payments to our stockholders. For the nine months ended September 30, 2018, financing activities included, but were not limited to, the generation of net IPO proceeds of $156.5 million: $143.0 million received at the closing of the IPO and $13.5 million received at the subsequent closing of the underwriters’ exercise of their option, the incurrence of $360.0 million of term loans under the Existing Credit Agreement, the repayment of $499.7 million of term loans under the 2014 Credit Agreement and the repayment of long-term debt under the Existing Credit Agreement of $80.0 million. For the nine months ended September 30, 2017, financing activities included, but were not limited to, the incurrence of $125.0 million of incremental term loans under the 2014 Credit Agreement, the payment of a dividend to stockholders in the amount of $121.1 million and the repayment of long-term debt in the amount of $45.9 million.

Financing activities used net cash of $80.0 million and $59.3 million for the nine months ended September 30, 2018 and 2017, respectively.

### Contractual Obligations

Except for principal payments on borrowings, interest payable and the Cerebellum Capital commitment, there have been no material changes outside of the ordinary course of business in our contractual obligations since December 31, 2017 as disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7 of our Form 10-K for the year ended December 31, 2017.

The table below sets forth these changes as of September 30, 2018, but does not update the other line items in the contractual obligations table that appear in the section of the Form 10-K described above:

*(in thousands)*

|  | Payments Due Total | Remainder of 2018 | One to Three Years | Three to Five Years | More Than Five Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Principal payments on borrowings(1) | $280,000 | $— | $— | $— | $280,000 |
| Interest payable(1)(2) | 93,038 | 3,675 | 29,162 | 29,162 | 31,039 |
| Cerebellum Capital commitment(3) | 1,000 | 1,000 | — | — | — |
| **Total** | $374,038 | $4,675 | $29,162 | $29,162 | $311,039 |

(1) The total principal payments on borrowings reflects the gross amount of principal outstanding on the term loans under the Existing Credit Agreement as of September 30, 2018.

(2) The total interest payable reflects the interest due on the principal amount of the term loans outstanding under the Existing Credit Agreement as of September 30, 2018 using the 5.14% interest rate in effect on that date.

(3) On March 2, 2018, the Company agreed to purchase an additional $3.0 million of participating preferred units in Cerebellum Capital in three installments of $1.0 million each. The Company made the first $1.0 million investment on April 1, 2018, the second $1.0 million investment on July 2, 2018, and the third $1.0 million investment on October 1, 2018.

### Off‑Balance Sheet Arrangements

In connection with dividends declared in February 2017 and December 2017, holders of restricted stock awards that were unvested at the time such dividends were declared are entitled to be paid the dividends as and when the restricted stock vests. Holders of stock options that were unvested at the time the December 2017 dividend were declared are entitled to receive a cash bonus equivalent of the December 2017 dividend as and when their stock options vest. These amounts are not recorded as a liability until and unless the awards vest in accordance with their respective agreements. As of September 30, 2018, the cash bonuses and distributions related to the February 2017 and December 2017 dividends on unvested and outstanding restricted shares and options totaled $2.0 million.

On March 2, 2018, the Company agreed to purchase an additional $3.0 million of participating preferred units in Cerebellum Capital in three installments of $1.0 million each. The Company made the first $1.0 million investment on April 1, 2018, the second $1.0 million investment on July 2, 2018, and the third $1.0 million investment on October 1, 2018. The investments are recorded when cash is paid to Cerebellum Capital and the corresponding participating preferred units are issued.

### Critical Accounting Policies and Estimates

Our financial statements and the accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates. Actual results will vary from these estimates. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Form 10-K. A complete description of our significant accounting policies is included in our 2017 audited consolidated financial statements and accompanying notes included in our 2017 Form 10-K.

## Market risk

As filed, 5,538 characters.

#### Market Risk

Substantially all of our revenues are derived from investment management, fund administration and distribution fees, which are based on the market value of our AUM. Accordingly, our revenues and net income may decline as a result of our AUM decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their assets in favor of other investment alternatives that they perceive to offer higher returns or lower risk, which could cause our revenues and net income to decline further.

The value of our AUM was $63.6 billion at September 30, 2018. A 10% increase or decrease in the value of our AUM, if proportionately distributed over all of our strategies, products and client relationships, would cause an annualized increase or decrease in our revenues of approximately $43.3 million at our weighted-average fee rate of 68 basis points for the quarter ended September 30, 2018. Because of declining fee rates from larger relationships and differences in our fee rates across investment strategies, a change in the composition of our AUM, in particular, an increase in the proportion of our total AUM attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted-average fee rate. The same 10% increase or decrease in the value of our total AUM, if attributed entirely to a proportionate increase or decrease in the AUM of the Victory Funds, to which we provide a range of services in addition to those provided to institutional separate accounts, would cause an annualized increase or decrease in our revenues of approximately $52.8 million at the Victory Funds’ aggregate weighted-average fee rate of 83 basis points for the quarter ended September 30, 2018. If the same 10% increase or decrease in the value of our total AUM was attributable entirely to a proportionate increase or decrease in the assets of our institutional separate accounts, it would cause an annualized increase or decrease in our revenues of approximately $29.3 million at the weighted-average fee rate across all of our institutional separate accounts of 46 basis points for the quarter ended September 30, 2018.

As is customary in the investment management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of those asset classes. We believe our clients invest in each of our strategies in order to gain exposure to the portfolio securities of the respective strategies and may implement their own risk management program or procedures. We have not adopted a corporate‑level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall AUM and related revenues. Some of these risks, such as sector and currency risks, are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to particular risks. While negative returns in our strategies and net client cash outflows do not directly reduce the assets on our balance sheet (because the assets we manage are owned by our clients, not us), any reduction in the value of our AUM would result in a reduction in our revenues.

#### Exchange Rate Risk

A portion of the accounts that we advise hold investments that are denominated in currencies other than the U.S. dollar. To the extent our AUM are denominated in currencies other than the U.S. dollar, the value of that AUM will decrease with an increase in the value of the U.S. dollar, or increase with a decrease in the value of the U.S. dollar. Each investment team monitors its own exposure to exchange rate risk and makes decisions on how to manage that risk in the portfolios they manage. We believe many of our clients invest in those strategies in order to gain exposure to non‑U.S. currencies, or may implement their own hedging programs. As a result, we generally do not hedge an investment portfolio’s exposure to non‑U.S. currency.

We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming 7% of our AUM are invested in securities denominated in currencies other than the U.S. dollar and excluding the impact of any hedging arrangement, a 10% increase or decrease in the value of the U.S. dollar would decrease or increase the fair value of our AUM by $445.5 million, which would cause an annualized increase or decrease in revenues of approximately $3.0 million at our weighted-average fee rate for the business of 68 basis points for the quarter ended September 30, 2018.

We operate in several foreign countries and incur operating expenses associated with these operations. In addition, we have revenue and revenue-sharing arrangements that are denominated in non-U.S. currencies. We do not believe foreign currency fluctuations materially affect our results of operations.

#### Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. At September 30, 2018, we were exposed to interest rate risk as a result of the amounts outstanding under the Existing Credit Agreement. See Note 8 to the unaudited condensed consolidated financial statements for a description of the amounts outstanding as of such date and the applicable interest rate.

## Controls and procedures

As filed, 1,439 characters.

### Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) at September 30, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

### Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the quarter ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 16,418 characters.

Except as set forth below, there have been no material changes with respect to our potential risks and uncertainties disclosed under the heading “Risk Factors” in our latest annual report on Form 10-K, which is accessible on the SEC’s website at www.sec.gov.

In the third quarter of 2018, the Company entered into the Harvest Purchase Agreement and the Harvest Commitment Letter. Subsequently, on November 6, 2018, the Company entered into the USAA Stock Purchase Agreement and the USAA AMCO Credit Facilities Commitment Letter related to the USAA AMCO Acquisition (together with the Harvest Acquisition, the “Acquisitions”, and each an “Acquisition”). See Note 3 and Note 14. Risk factors related to each of the Acquisitions are discussed below, and should be read together with, the risk factors disclosed in our latest annual report on Form 10-K.

***Risks and uncertainties associated with Acquisitions may adversely affect our business, financial performance and stock price.***

The Acquisitions may involve a number of risks, including those known and unknown, and contingent liabilities.

- The Acquisitions may impose additional demands on our staff that could strain our operational resources and require expenditure of substantial legal, consulting and/or accounting fees.
- The Acquisitions require us to spend significant cash to consummate each Acquisition and the Harvest Acquisition requires us to issue additional shares of common stock to consummate the Harvest Acquisition, which will result in additional debt leverage and dilution of ownership.
- We may spend additional time and money on facilitating either or both Acquisitions that otherwise would be spent on the development and expansion of our existing business.
- The process of integrating operations of Harvest and/or the USAA Acquired Companies could cause an interruption of, or loss of momentum in, the activities of our business.
- The diversion of management's attention and any delays or difficulties encountered in connection with either or both Acquisitions could have an adverse effect on our business.

***The Acquisitions are subject to closing conditions, including certain conditions that may not be satisfied, and they may not be completed on a timely basis, or at all. Failure to complete either Acquisition could have material and adverse effects on the Company.***

#### Harvest Purchase Agreement

On September 21, 2018, the Company entered into the Harvest Purchase Agreement, whereby the Company has agreed to purchase 100% of the equity interests of Harvest. The completion of the Harvest Acquisition is subject to a number of closing conditions, including (1) the receipt of consents representing revenues of at least 80% of a baseline revenue amount, (2) the expiration or termination of the applicable waiting period under the HSR Act, which termination was received on November 6, 2018, (3) the absence of any material adverse effect (as defined in the Harvest Purchase Agreement) on the business of Harvest and its subsidiaries or the business of the Company, (4) the two Harvest principals not having resigned (or given notice of resignation) and each performing his respective duties under certain employment documentation and (5) other customary closing conditions. In addition, either Harvest or we may terminate the Harvest Purchase Agreement if the Harvest Acquisition has not been completed by the June 11, 2019.

#### USAA Stock Purchase Agreement

On November 6, 2018, the Company entered into the USAA Stock Purchase Agreement, whereby the Company has agreed to purchase 100% of the outstanding common stock of the USAA Acquired Companies. The USAA Acquired Companies are wholly-owned subsidiaries of USAA Investment Corporation. The USAA AMCO Acquisition is expected to close around the end of the second quarter of 2019, subject to the satisfaction or waiver of certain closing conditions.

If either Acquisition is not completed on a timely basis or at all, our ongoing business may be adversely affected. Additionally, in the event either Acquisition is not completed, the Company will be subject to a number of risks without realizing any of the benefits of having completed either Acquisition, including the following:

- We will be required to pay our costs relating to the Acquisition(s), such as legal, accounting and financial advisory fees;
- Time and resources committed by our management to matters relating to the Acquisitions could otherwise have been devoted to pursuing other beneficial opportunities; and
- The market price of our securities could decline to the extent that the current market price reflects a market assumption that one or both Acquisitions will not be completed, or to the extent that either Acquisition is fundamental to our business strategy.

***We may not realize the benefits we expect from either Acquisition because of integration difficulties and other challenges.***

The success of the Acquisitions will depend in large part on the success of integrating the personnel, operations, strategies, technologies and other components of the businesses following the completion of the Acquisition(s). The Company may fail to realize some or all of the anticipated benefits of the Acquisitions if the integration process takes longer than expected or is more costly than expected. The failure of the Company to meet the challenges involved in successfully integrating the operations of Harvest and the USAA Acquired Companies or to otherwise realize any of the anticipated benefits of either Acquisition could impair the operations of the Company. In addition, the Company anticipates that the overall integration of Harvest and the USAA Acquired Companies will be a time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt the Company’s business. Potential difficulties the combined business may encounter in the integration process include the following:

- The integration of personnel, operations, strategies, technologies and support services;
- The disruption of ongoing businesses and distraction of their respective personnel from ongoing business concerns;
- The retention of the existing clients and the retention or transition of vendors;
- The retention of key intermediary distribution relationships;
- The integration of corporate cultures and maintenance of employee morale;
- The retention of key employees;
- The creation of uniform standards, controls, procedures, policies and information systems;
- The reduction of the costs associated with combining operations;
- The consolidation and rationalization of information technology platforms and administrative infrastructures; and
- Potential unknown liabilities associated with the Acquisitions.

The anticipated benefits and synergies include the elimination of duplicative personnel, realization of efficiencies in consolidating duplicative corporate, business support functions and amortization of purchased intangibles for tax purposes. However, these anticipated benefits and synergies assume a successful integration and are based on projections, which are inherently uncertain, and other assumptions. Even if integration is successful, anticipated benefits and synergies may not be achieved.

***Uncertainty regarding the completion of the Acquisitions may cause their clients to withdraw assets under management or to decline to place additional assets under management, or may cause their potential clients to delay or defer decisions concerning the Acquisitions.***

#### Withdrawal of clients and loss of AUM resulting from uncertainty concerning the Harvest Acquisition

The Harvest Acquisition will happen only if stated conditions are met, including, among others, the receipt of a baseline level of required consents from the Harvest clients. Many of the conditions are beyond the control of the Company. In addition, both Harvest and the Company have rights to terminate the merger agreement under various circumstances. As a result, there may be uncertainty regarding the completion of the Harvest Acquisition. This uncertainty, along with potential Harvest client uncertainty regarding how the acquisition could affect the services offered by Harvest, may cause their clients to withdraw assets under management or to decline to place additional assets under management, and may cause potential Harvest clients to delay or defer decisions concerning entering into a relationship with Harvest, which could negatively impact revenues and earnings of Harvest.

#### Withdrawal of clients and loss of AUM resulting from uncertainty concerning the USAA AMCO Acquisition

Under the U.S. Investment Company Act of 1940, as amended, or the “1940 Act”, the investment advisory agreements between each mutual fund (a “USAA mutual fund”) in the USAA Mutual Funds Trust, an open-end management investment company registered under the 1940 Act, and each ETF (a “USAA ETF”) in the USAA ETF Trust, also an open-end management investment company registered under the 1940 Act, on the one hand, and USAA Asset Management Company, on the other hand, will terminate automatically in the event USAA Asset Management Company undergoes a change of control as recognized under the 1940 Act. Consummation of the USAA AMCO Acquisition will constitute such a change of control. The continuation of the investment advisory relationship by each USAA mutual fund and USAA ETF (either, a “USAA fund”) with either the Company or USAA Asset Management Company following the consummation of the USAA AMCO Acquisition requires the approval of both the board of trustees and the shareholders of the applicable USAA fund. The continuation of the investment advisory relationship may be through the approval of a new investment advisory agreement between the USAA fund and the Company (or, in the alternative, USAA Asset Management Company) or, in the case of the USAA ETFs, the reorganization of the ETF into a successor ETF organized as a new series of Victory Portfolios II, an existing open-end management investment company, to be advised by the Company. If either the board of trustees or shareholders of a USAA fund do not approve such new investment advisory agreement or reorganization, and the parties to the USAA AMCO Acquisition proceed to close the USAA AMCO Acquisition, then the existing investment advisory agreement between such USAA fund and USAA Asset Management Company will terminate automatically and the board of trustees of such USAA fund may take further action as it deems to be in the best interests of such USAA fund. That may include approval of an interim advisory agreement with the Company or USAA Asset Management Company that would go into effect to permit additional time to solicit the required shareholder approval. In addition, as required by the Advisers Act, each of the investment advisory agreements for the separate accounts that USAA Asset Management Company manages include a provision that prohibit its assignment, as defined in the Advisers Act (which would include an assignment through a change in control such as the consummation of the USAA AMCO Acquisition), without the consent of the separate account client. The termination of any investment advisory agreement relating to a material portion of assets under management or the redemption of a material portion of assets from the USAA Funds would have an adverse impact on USAA Asset Management Company’s results of operations and financial condition as well as any anticipated benefits from the USAA AMCO Acquisition.

***The increase in indebtedness of the Acquisitions may expose us to material risks.***

As of September 30, 2018, we had $280.0 million of outstanding term loans under the Existing Credit Agreement. In connection with the Acquisitions, we expect to incur a substantial amount of additional indebtedness. In connection with the USAA AMCO Acquisition, we have received the USAA AMCO Credit Facilities Commitment Letter providing for up to $1.395 billion of new indebtedness to refinance our existing credit facility available pursuant to the Existing Credit Agreement, finance the Acquisitions and pay related fees and expenses. Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. Following the closing of the Acquisitions, the Company, including the combined businesses, may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

The incurrence of indebtedness contemplated by the Acquisitions will subject us to financial and operating covenants, which may limit our flexibility in responding to our business needs. If we are not able to maintain compliance with stated financial covenants or if we breach other covenants in any debt agreement, whether related to the Harvest Facility, the USAA AMCO Credit Facilities or otherwise, we could be in default under such debt agreement. Such a default could allow our creditors to accelerate the related indebtedness and may result in the acceleration of any other indebtedness to which a cross-acceleration or cross-default provision applies.

Our overall leverage and terms of our debt facilities could, among other things:

- Make it more difficult to satisfy our obligations under the terms of our indebtedness, including the new debt facility;
- Limit our ability to refinance our indebtedness on terms acceptable to us or at all;
- Limit our flexibility to plan for and adjust to changing business and market conditions and increase our vulnerability to general adverse economic and industry conditions;
- Require us to dedicate a substantial portion of our cash flows to make interest and principal payments on our debt, thereby limiting the availability of our cash flow to fund future acquisitions, working capital, business activities, and other general corporate requirements; and/or
- Limit our ability to obtain additional financing for working capital, to fund growth or for general corporate purposes, even when necessary to maintain adequate liquidity, particularly if any ratings assigned to our debt facilities by rating organizations were revised downward.

***The pending USAA AMCO Acquisition is expected to accelerate the timing of when we cease to be an emerging growth company, resulting in increased reporting and disclosure requirements.***

We are an emerging growth company and, for as long as we continue to be an emerging growth company, we may choose to continue to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 and taking advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of our IPO, (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our Class A common stock held by non-affiliates is at least $700 million as of the end of the second quarter of that fiscal year. The USAA AMCO Acquisition, if consummated, is expected to accelerate the timing of when we cease to be an emerging growth company to a period shorter than the fifth anniversary of our IPO. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in the reliability of our financial statements.

Filed Nov 13, 2018.
Source: SEC EDGAR, the filing index for accession 0001558370-18-009272. Last ingested by Listed: Nov 4, 2026, 18:36 ET. No prices; not investment advice.