Exhibit 99.3

 

 

FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2021 AND 2020

 

 

 

 

 

 

See notes to financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to financial statements.

 

 

 

 

 

 

 

 

 

 

 

See notes to financial statements.

 

WESTEND ADVISORS, LLC

 

NOTES TO FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

 

1.SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Operations - WestEnd Advisors, LLC (the “Company”) is an investment advisor registered with the U.S Securities and Exchange Commission and headquartered in Charlotte, North Carolina.  The Company provides discretionary and non-discretionary portfolio management services to institutional and individual investors located in North America. The Company’s principal investment offerings are its Large-Cap Core Equity, US Sector Exchange-Traded Fund (“ETF”), Global Equity ETF, Global Balanced ETF and Global Conservative ETF strategies.

 

Change in Accounting Principle - The Company’s financial statements have been adjusted to conform to the requirements of Regulation S-X. Under SEC Accounting Series Release (“ASR”) 268, “Presentation in Financial Statements of ‘Preferred Redeemable Stock’,” units that are redeemable in cash or other assets at the option of the holder or upon the occurrence of an event that is not solely within the control of the issuer are to be classified as temporary equity and measured at the value of the redemption right. Under the terms of the Company’s operating agreement, the Class A units are required to be redeemed upon the death or disability of the holder, and Class B units are required to be redeemed at the end of their fifteen-year term. To conform to the requirements of ASR 268, the redemption value of Class A and Class B units at December 31, 2019 and December 31, 2020 was calculated at $29,983,300 and $42,495,727, respectively, and these amounts were reclassified from members’ equity (permanent equity) to redeemable units (temporary equity).

 

Use of Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures.  Accordingly, the actual amounts could differ from those estimates.  Any adjustments applied to estimated amounts are recognized in the year in which such adjustments are determined.

 

Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains cash deposits with financial institutions that, at times, may exceed federally insured limits.  

 

Accounts Receivable - The Company extends credit to its customers. By their nature, all accounts receivable involve risk, including the credit risk of nonpayment by customers. The Company’s standard payment terms and conditions generally require payment within thirty days of the invoice date; however, timing of payment with specific customers may be separately negotiated. Accounts receivable are considered past due based on contractual and invoice terms.  Accounts deemed uncollectible are charged directly to bad debt expense.  As of September 30, 2021 and December 31, 2020, all remaining accounts receivable were considered collectible by management. Accordingly, no allowances have been provided in the accompanying financial statements.  The Company did not incur bad debt expense on customer accounts during the nine months ended September 30, 2021 or 2020.

 

Property - Property is recorded at cost.  Depreciation is computed using the straight-line method based on the estimated useful lives of the respective assets.

 

 

 

Revenue Recognition - The Company’s revenue represents fees earned from providing portfolio management services. The Company enters into contracts with customers to provide portfolio management services. Each contract requires a series of distinct services that are substantially the same and have the same pattern of transfer, representing a single performance obligation. Performance obligations are satisfied, and revenues are earned as services are provided on a daily basis using a time-based output method to measure progress.

 

Portfolio management fees are considered variable consideration as they are typically calculated as a percentage of assets under management. In such cases, the amount of fees earned is subject to factors outside of the Company’s control including customer or underlying investor contributions and redemptions and financial market volatility. These fees are considered constrained and are excluded from the transaction price until the market value of assets under management is known at month or quarter end. Variable consideration is included in the transaction price only when it is probable that a significant reversal of such revenue will not occur when the uncertainties associated with the variable consideration is subsequently resolved.

 

The timing of when the Company receives payments from customers for portfolio management services varies in accordance with the agreed‐upon contractual terms. Certain of the Company’s customers are billed after the service is performed, which results in the recording of accounts receivable and accrued revenue. Deferred revenue is recorded in instances where a client pays fees in advance.  Most of the Company’s revenue is earned from customers who pay fees on a monthly or quarterly basis in advance.  As this revenue is fully earned by the end of each calendar quarter, no deferred revenue is recorded as of September 30, 2021 and December 31, 2020.

 

The nature, amount, timing and uncertainty of the Company’s revenue and cash flows are impacted by various economic factors, including the general performance of the market economy, investor interest in the Company’s investment strategies, and the composition of the Company’s customer base. The Company’s investment strategies are primarily delivered to investors through broker-dealers and investment advisors utilizing unified management accounts.

 

The Company is required to capitalize certain costs directly related to the acquisition or fulfillment of a contact with a customer. The Company has not identified any sales-based compensation or similar costs that meet the definition of an incremental cost to acquire a contract and as such has no intangible assets related to contract acquisitions. Costs to fulfill contracts, such as commissions, are expensed when incurred because the constraints surrounding variable consideration prevent management from determining whether or not such costs would be recovered by future revenues.

 

For further information on the Company’s revenue and customers, refer to Note 3.

 

Accrued Rent - The Company recognizes lease expense on a straight-line basis over the term of the respective lease. Accrued rent arises from leases that provide for lease payments that differ from a straight-line basis.

 

Income Taxes - For income tax purposes, the Company is considered to be a partnership.  Accordingly, no provision for federal or state income taxes has been made in the accompanying financial statements since the members include their allocable share of the Company’s taxable income or loss in their respective individual income tax returns.

 

The Company records liabilities for income tax positions taken or expected to be taken when those positions are deemed uncertain to be upheld in an examination by taxing authorities. No liabilities for uncertain income tax positions were recorded as of September 30, 2021 and December 31, 2020.

 

 

Recent Accounting Pronouncements - In February 2016, the Financial Accounting Standards Board ("FASB") issued new guidance for the accounting for leases and issued additional guidance thereafter providing transition relief and a package of practical expedients to apply upon adoption of the new lease guidance. The new guidance requires lessees to recognize a right-of-use asset and a lease liability for substantially all leases on their balance sheet at the commencement date and recognize expense in the income statement similar to that recognized under existing lease guidance. The guidance is effective for the Company on January 1, 2022. The Company is currently evaluating the impact of adopting the guidance.

 

In June 2016, the FASB issued guidance creating a new model for determining current expected credit losses (“CECL”) on trade and other receivables. The new CECL impairment model requires companies to consider the risk of loss even if it is remote and to include forecasts of future economic conditions as well as information about past events and current conditions in the CECL determination. The new guidance is effective for the Company on January 1, 2023. The Company is currently reviewing the effect of this new standard on its financial statements.

 

Subsequent Events - In preparing its financial statements, the Company has evaluated subsequent events through March 10, 2022, which is the date the financial statements were available to be issued.

 

2.NOTES PAYABLE

 

Notes payable as of September 30, 2021 and December 31, 2020 consisted of the following:

 

 

 

 

Scheduled maturities of the Company’s notes payable as of September 30, 2021 were as follows:

 

 

3.REVENUE

 

The following table disaggregates total revenue by source for the nine months ended September 30, 2021 and 2020:

 

 

The following table presents the beginning and ending balances of accounts receivable resulting from contracts with customers for the nine month periods ended September 30, 2021 and 2020:

 

 

 

 

4.LEASE COMMITMENTS

 

The Company leases certain equipment and facilities from unrelated third parties under agreements classified as operating leases. These leases contain provisions for additional amounts to be paid by the Company for common area maintenance costs and other usage fees. Rent expense under these agreements totaled approximately $168,000 and $125,000 for the nine months ended September 30, 2021 and 2020, respectively.

 

Approximate future minimum lease payments under the above operating leases as of September 30, 2021, are as follows:

 

 

5.EMPLOYEE BENEFIT PLAN

 

The Company maintains a retirement plan under which eligible employees can defer a portion of their compensation under the provisions of section 401(k) of the Internal Revenue Code.  Company matching and additional profit sharing contributions are made at the discretion of management. Company contributions to the plan totaled approximately $141,000 and $127,000 for the nine months ended September 30, 2021 and 2020, respectively.

 

6.REDEEMABLE UNITS AND MEMBERS’ DEFICIT

 

The members of the Company are subject to an operating agreement which specifies the rights and obligations of its members.  In accordance with the terms of the agreement, each member's liability is limited to the capital they have contributed to the Company.  Among other things, the agreement stipulates the allocation of profits, losses and distributions to its members, as well as the terms and conditions under which ownership interests can be sold or transferred.

 

Per the Company’s operating agreement there are two classes of member units: Class A units, which have voting rights, and Class B units, which do not have voting rights.  As of September 30, 2021 and 2020, there were 100 Class A units authorized and issued and 1,000 Class B units authorized and issued.  The Class B units entitle the Class B member to a 19.75% interest in the Company's gross revenues, net of certain expenses, for a period of 15 years from the date of issuance.  Distributions of this preferred interest to the Class B member are payable on a quarterly basis.  At the expiration of the 15 year period, the Class B Member will no longer be a member of the Company and is not entitled to future benefits.  If a liquidating event were to occur prior to the termination date, the Company would be required to pay a make-whole redemption price to the Class B member as specified by the agreement.

 

The operating agreement also requires the redemption of a Class A member’s interest in the event of death or disability.  Under certain circumstances, the agreement also allows the other Class A members to require, by unanimous consent, a Class A member to sell his interest to the Company. The purchase price and terms of such redemptions are defined by the agreement.

Effective December 31, 2019, the Company redeemed a Class A member’s interest, consisting of 24 Class A units, in exchange for a promissory note equal to the formula value of the member’s interest in the Company as defined by the operating agreement. (See Note 2.)  The former member was entitled to five annual installment payments due on December 31 of each calendar year. The Company had the right to repay the entire remaining principal balance of the promissory note as then valued prior to December 31 of each calendar year.  

 

Accordingly, as of December 31, 2019, the Company recorded the redemption amount of $1,621,559, which represented the amount they would have to pay if they paid the full amount prior to December 31, 2020.  The Company elected to repay the entire note balance in August 2020. The 24 Class A units redeemed by the Company were reallocated to the remaining members as of December 31, 2019.

 

The Company considers Class A units to be redeemable equity since the Company is required to purchase a Class A member's interest upon death.  The Company considers Class B units to be redeemable equity since the term of the Class B member interest is limited to no more than 15 years.  Redeemable equity is recorded at its redemption value in redeemable units on the balance sheet with corresponding adjustments reflected in members’ deficit.  The redemption value of the Class B units at September 30, 2021 and 2020 is equal to a multiple of the Company’s trailing twelve-month revenue at those dates based on the formulas specified by the operating agreement. The redemption value of the Class A units at September 30, 2021 and 2020 is equal to the average of annual revenues for the last three trailing twelve-month periods as of those dates. Changes in the redemption value of redeemable units for the period ended September 30, 2021 and 2020 are included in the statements of changes in redeemable units and members’ deficit.

 

7.CONCENTRATIONS

 

Revenue from the Company’s four largest customers accounted for approximately 72% and 73% of total revenue during the nine months ended September 30, 2021 and 2020, respectively.

 

Amounts owed from two customers accounted for approximately 88% of the Company’s total accounts receivable as of September 30, 2021.

 

8.SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental cash flow information for the nine months ended September 30, 2021 and 2020 was as follows:

 

 

9.SUBSEQUENT EVENTS

 

Effective December 31, 2021, 100% of the members’ equity of the Company was acquired by Victory Capital Holdings, Inc.  In conjunction with the acquisition, the note payable to a bank referred to in Note 2 was paid in full.