The Transactions
On June 20, 2018, Newmark announced that it had entered into certain transactions related to the monetization of certain shares of Nasdaq, Inc.
(Nasdaq) common stock it expects to receive in 2019 and 2020 as described below. Net of transaction costs, Newmark received $152,885,669.35 of cash in the second quarter of 2018 with respect to this transaction.
Newmark Partners, L.P. (Newmark OpCo), the principal operating subsidiary of Newmark, issued two new series of exchangeable preferred limited
partnership units (the Newmark OpCo EPUs) to Royal Bank of Canada (RBC) for an aggregate amount of approximately $175 million in cash (the Newmark OpCo Preferred Investment). Concurrently therewith, Newmark SPV I,
LLC, a newly formed Delaware limited liability company and a direct, wholly owned subsidiary of Newmark OpCo (Newmark SPV), entered into two variable postpaid forward transactions (together, the Forward) with RBC involving up
to an aggregate of 1,984,494 shares of Nasdaq, Inc. (Nasdaq) common stock (Nasdaq Shares) which are expected to be received by Newmark SPV in the fourth quarter of each of 2019 and 2020, as further described below
(collectively, with the Newmark OpCo Preferred Investment, the Transactions).
As partial consideration for the sale of eSpeed, Inc. to Nasdaq
on June 28, 2013, BGC Partners, Inc., the parent company of Newmark, acquired the right to receive up to 14,883,705 Nasdaq Shares, payable ratably through 2027 in the fourth quarter of each year provided that Nasdaq produces at least
$25 million in gross revenues for the applicable year (the Nasdaq
Earn-out).
Nasdaq has recorded more than $2.4 billion in gross revenues for each of the past 11 calendar years and
generated gross revenues of approximately $4.0 billion in 2017. In connection with the separation of Newmark from BGC in December 2017, the Nasdaq
Earn-out
was transferred to Newmark OpCo. As a result,
Newmark OpCo is entitled to receive the remaining approximately 9.9 million Nasdaq Shares pursuant to the Nasdaq
Earn-out,
which have an aggregate value of approximately $935 million based on the
closing price of Nasdaq Shares on June 18, 2018. In connection with the Transactions, Newmark OpCo has assigned to Newmark SPV its right to receive the Nasdaq Shares pursuant to the Nasdaq
Earn-out
for
the 2019 and 2020 calendar years, which include an aggregate of 1,984,494 Nasdaq Shares, subject to certain conditions and adjustments. Newmark OpCo will retain the right to receive the remaining Nasdaq Shares pursuant to the Nasdaq
Earn-out
that were not assigned to Newmark SPV.
The Transactions enable Newmark to monetize the Nasdaq
Earn-out
for each
of the 2019 and 2020 calendar years by issuing the Newmark OpCo EPUs for cash. Newmark SPV will deliver a certain number of Nasdaq Shares in exchange for such Newmark OpCo EPUs as settlement of the Forward in 2019 and 2020 (subject to Newmark
SPVs ability to elect certain alternative settlement methods). Additionally, the Forward contains provisions the economic effect of which is equivalent to Newmark SPV purchasing two
at-the-money
put options with respect to the Nasdaq Shares, which will provide economic protection in the event the Nasdaq Shares decline in value while enabling Newmark to retain any increase in the value of
the Nasdaq Shares as fewer Nasdaq Shares will be deliverable to RBC should the value of the Nasdaq Shares rise above the reference price. The Transactions enable Newmark to generate immediate liquidity and recognize permanent equity capital on its
balance sheet without expected dilution to Newmarks stockholders.
In connection with the Transactions, Newmark and/or its subsidiaries entered into
the following agreements:
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(a)
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Newmark SPV entered into the Forward with RBC pursuant to a Confirmation Agreement (the Confirmation Agreement), referencing the Nasdaq Shares deliverable to Newmark SPV. Under the Confirmation Agreement,
each party has the right to trigger settlement of the Forward at any time during each
one-year
period commencing on November 30 of the applicable year. Once settlement is triggered, absent contrary
election by Newmark SPV, RBC will deliver the applicable series of Newmark OpCo EPUs to Newmark SPV, and Newmark SPV will deliver a number of Nasdaq Shares calculated based on the volume weighted average price (VWAP) of Nasdaq Shares for
each of 10 trading days prior to trade settlement date using $94.21 as the reference Nasdaq Share price. On each trade settlement date, if the Nasdaq Share price has fallen below the reference price, Newmark SPV delivers a maximum of 992,247 Nasdaq
Shares for the applicable tranche and thus the value of the delivered Nasdaq Shares falls with the Nasdaq Share price, and if the Nasdaq Share price has increased, Newmark SPV delivers a number of Nasdaq Shares equal to the fully accreted value of
the applicable series of EPUs, which will always be less than the 992,247 Nasdaq Shares receivable by Newmark SPV from Nasdaq with respect to the applicable tranche and thus the value of the Nasdaq Shares retained by Newmark SPV increases as the
Nasdaq Share price increases. Although Newmark presently anticipates utilizing the foregoing settlement method, Newmark SPV has the right to elect to receive cash in lieu of the Newmark OpCo EPUs and/or to deliver Newmark Class A common stock,
par value $0.01 per share (the Newmark Common Stock) in lieu of Nasdaq Shares. The terms of the Forward may be adjusted, and the Forward terminated, in certain circumstances based on Nasdaq corporate actions and other events such as
mergers, nationalization and delisting. The Forward also contains certain other customary representations, warranties, covenants, events of default and termination rights. Additional forward transactions referencing Nasdaq Shares may be entered into
pursuant to the Confirmation Agreement on economic terms agreed at the time any such additional transaction is entered into.
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(b)
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Newmark OpCo amended and restated its limited partnership agreement (the Second A&R Limited Partnership Agreement). Pursuant to the Second A&R Limited Partnership Agreement, the Newmark OpCo EPUs
were authorized and designated as Series A EPUs and Series B EPUs, which may be exchanged at the election of either Newmark OpCo or the holders of the Newmark OpCo EPUs for up to a maximum of 12,649,471 shares of Newmark
Common Stock, based on a price of $14.78 per share, subject to certain conditions including Newmarks consolidated revenues exceeding $475 million in the third quarters of 2019 or 2020. Newmark does not presently anticipate that such election
will be exercised by Newmark or the holders of the Newmark OpCo EPUs. The holders of EPUs are not allocated any gains or losses for tax purposes and are not entitled to regular distributions. The EPUs were issued to RBC pursuant to the exemption
provided by Section 4(a)(2) of the Securities Act of 1933, as amended. The Audit Committee of the Board of Directors of Newmark has approved the Newmark OpCo Preferred Investments.
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(c)
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Newmark, Newmark OpCo and RBC entered into a Parent Agreement pursuant to which Newmark and Newmark OpCo, among other things, agreed to observe certain separateness covenants relating to Newmark SPV and provide a
limited guaranty in respect of certain delivery obligations of Newmark SPV under the Forward. The assets and liabilities of Newmark SPV are legally separated from other assets and liabilities of Newmark, Newmark OpCo and its affiliates. The assets
of Newmark SPV will not be available to its stockholders until the claims of its creditors have been paid.
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The foregoing descriptions of the Confirmation Agreement, the Second A&R Limited Partnership Agreement, and
the Parent Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of each such agreement, which are attached hereto as Exhibits 10.1, 10.2 and 10.3, respectively, and incorporated herein by
reference.
Repayment of Term Loan
As
previously disclosed, on November 22, 2017, BGC and Newmark entered into an amendment to the unsecured senior revolving credit agreement (the Credit Agreement), dated as of September 8, 2017, with Bank of America, N.A., as
administrative agent (the Administrative Agent), and a syndicate of lenders, pursuant to which the outstanding balance of revolving loans under the Credit Agreement totaling $400 million was converted to a term loan (the
Converted Term Loan) and assumed by Newmark. Newmark is required to and has used the net proceeds from the Newmark OpCo Preferred Investment to repay approximately $153 million of the outstanding principal amount under the Converted
Term Loan, which amount then became available for BGC to draw upon under its revolving credit facility under the Credit Agreement. After such repayment, approximately $247 million of the Converted Term Loan remains outstanding.
Newmark
Non-GAAP
Financial Measures
In the press release, Newmark uses
non-GAAP
financial measures including, but not limited to,
pre-tax
Adjusted Earnings and
post-tax
Adjusted Earnings, which are supplemental measures of operating results that are used by management to evaluate
the financial performance of the Company and its consolidated subsidiaries. Newmark believes that Adjusted Earnings best reflect the operating earnings generated by the Company on a consolidated basis and are the earnings which management considers
available for, among other things, dividends and/or distributions to Newmarks common stockholders and holders of Newmark Holdings partnership units during any period.
As compared with items such as Income (loss) before income taxes and noncontrolling interests and Net income (loss) for fully diluted
shares all prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain
non-cash
compensation and other expenses that generally do not involve the receipt or outlay of cash
by the Company and/or which do not dilute existing stockholders, as described below. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary operating results of
Newmark.
Adjustments Made to Calculate Newmarks
Pre-Tax
Adjusted Earnings
Newmark defines
pre-tax
Adjusted Earnings as GAAP income (loss) from operations before income taxes and noncontrolling
interest in subsidiaries, excluding certain items such as:
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The impact of any unrealized
non-cash
mark-to-market
gains or losses on other income
(loss) related to the variable share forward (Nasdaq Forward) agreement with respect to Newmarks expected receipt of the Nasdaq payments in 2019 and 2020;
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Non-cash
asset impairment charges, if any;
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Allocations of net income to limited partnership units;
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Non-cash
charges related to the amortization of intangibles with respect to acquisitions;
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Non-cash
charges relating to grants of exchangeability to limited partnership units.
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Virtually all of the Companys key executives and producers have partnership or equity stakes in the Company and receive deferred equity or limited
partnership units as part of their compensation. A significant percentage of Newmarks fully diluted shares are owned by the Companys executives, partners and employees. The Company issues limited partnership units and grants
exchangeability to unit holders to provide liquidity to Newmarks employees, to align the interests of the Companys employees and management with those of common stockholders, to help motivate and retain key employees, and to encourage a
collaborative culture that drives cross-selling and revenue growth.
When the Company issues limited partnership units, the shares of common stock into
which the units can be ultimately exchanged are included in Newmarks fully diluted share count for Adjusted Earnings at the beginning of the subsequent quarter after the date of grant. Newmark includes such shares in the Companys fully
diluted share count when the unit is granted because the unit holder is expected to be paid a
pro-rata
distribution based on Newmarks calculation of Adjusted Earnings per fully diluted share and because
the holder could be granted the ability to exchange their units into shares of common stock in the future.
Non-cash
charges with respect to grants of exchangeability reflect the value of the shares of common
stock into which the unit is exchangeable when the unit holder is granted exchangeability not previously expensed in accordance with GAAP. The amount of
non-cash
charges relating to grants of exchangeability
the Company uses to calculate
pre-tax
Adjusted Earnings on a quarterly basis is based upon the Companys estimate of expected grants of exchangeability to limited partnership units during the annual
period, as described further below under Adjustments Made to Calculate
Post-Tax
Adjusted Earnings.
Adjusted Earnings also excludes
non-cash
GAAP gains attributable to
originated mortgage servicing rights (which Newmark refer to as OMSRs) and
non-cash
GAAP amortization of mortgage servicing rights (which the Company refers to as MSRs). Under GAAP, the
Company recognizes OMSRs gains equal to the fair value of servicing rights retained on mortgage loans originated and sold. Subsequent to the initial recognition at fair value, MSRs are carried at the lower of amortized cost or fair value and
amortized in proportion to the net servicing revenue expected to be earned. However, it is expected that any cash received with respect to these servicing rights, net of associated expenses, will increase Adjusted Earnings (and Adjusted EBITDA) in
future periods.
Additionally, Adjusted Earnings calculations exclude certain unusual,
one-time
or
non-recurring
items, if any. These items are excluded from Adjusted Earnings because the Company views excluding such items as a better reflection of the ongoing, ordinary operations of Newmark. Newmarks
definition of Adjusted Earnings also excludes certain gains and charges with respect to acquisitions, dispositions, or resolutions of litigation. Management believes that excluding such gains and charges also best reflects the ongoing operating
performance of Newmark.
Adjustments Made to Calculate Newmarks
Post-Tax
Adjusted Earnings
Because Adjusted Earnings are calculated on a
pre-tax
basis, Newmark also intends to report
post-tax
Adjusted Earnings to fully diluted stockholders. Newmark defines
post-tax
Adjusted Earnings to fully diluted stockholders as
pre-tax
Adjusted Earnings reduced by the
non-GAAP
tax provision described below.
The Company calculates its tax provision for
post-tax
Adjusted Earnings using an annual estimate similar to how it
accounts for its income tax provision under GAAP. To calculate the quarterly tax provision under GAAP, Newmark estimates its full fiscal year GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries and the
expected inclusions and deductions for income tax purposes, including expected grants of exchangeability to limited partnership units during the annual period. The resulting annualized tax rate is applied to Newmarks quarterly GAAP income
(loss) from operations before income taxes and noncontrolling interests in subsidiaries. At the end of the annual period, the Company updates its estimate to reflect the actual tax amounts owed for the period.
To determine the
non-GAAP
tax provision, Newmark first adjusts
pre-tax
Adjusted Earnings by recognizing any, and only, amounts for which a tax deduction applies under applicable law. The amounts include
non-cash
charges with respect to grants of exchangeability, certain charges
related to employee loan forgiveness, certain net operating loss carryforwards when taken for statutory purposes, and certain charges related to tax goodwill amortization. These adjustments may also reflect timing and measurement differences,
including treatment of employee loans, changes in the value of units between the dates of grants of exchangeability and the date of actual unit exchange, variations in the value of certain deferred tax assets and liabilities and the different timing
of permitted deductions for tax under GAAP and statutory tax requirements.
After application of these previously described adjustments, the result is the
Companys taxable income for Newmarks
pre-tax
Adjusted Earnings, to which the Company then applies the statutory tax rates. This amount is the Companys
non-GAAP
tax provision. Newmark views the effective tax rate on
pre-tax
Adjusted Earnings as equal to the amount of Newmarks
non-GAAP
tax provision divided by the amount of
pre-tax
Adjusted Earnings.
Generally, the most significant factor affecting this
non-GAAP
tax provision is the amount of
non-cash
charges relating to the grants of exchangeability to limited partnership units. Because the
non-cash
charges relating to the grants of exchangeability are deductible
in accordance with applicable tax laws, increases in exchangeability have the effect of lowering the Companys
non-GAAP
effective tax rate and thereby increasing Newmarks
post-tax
Adjusted Earnings.
Management uses
post-tax
Adjusted Earnings in part
to help it evaluate, among other things, the overall performance of the business, to make decisions with respect to the Companys operations, and to determine the amount of dividends payable to common stockholders and distributions payable to
holders of limited partnership units.
Newmark incurs income tax expenses based on the location, legal structure and jurisdictional taxing authorities of
each of its subsidiaries. Certain of the Companys entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (UBT) in New York City. Any U.S. federal and state income tax liability or benefit related
to the partnership income or loss, with the exception of UBT, rests with the unit holders rather than with the partnership entity. The Companys consolidated financial statements include U.S. federal, state and local income taxes on the
Companys allocable share of the U.S. results of operations. Outside of the U.S., Newmark is expected to operate principally through subsidiary corporations subject to local income taxes. For these reasons, taxes for Adjusted Earnings are
expected to be presented to show the tax provision the consolidated Company would expect to pay if 100 percent of earnings were taxed at global corporate rates.
Calculations of Newmarks
Pre-Tax
and
Post-Tax
Adjusted Earnings per Share
Newmarks Adjusted Earnings per share calculations assume either that:
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The fully diluted share count includes the shares related to any dilutive instruments, but excludes the associated interest expense, net of tax, when the impact would be dilutive; or
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The fully diluted share count excludes the shares related to these instruments, but includes the associated interest expense, net of tax.
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The share count for Adjusted Earnings excludes certain shares expected to be issued in future periods but not yet eligible to receive dividends and/or
distributions. Each quarter, the dividend payable to Newmarks common stockholders, if any, is expected to be determined by the Companys Board of Directors with reference to a number of factors, including
post-tax
Adjusted Earnings per fully diluted share. Newmark may also pay a
pro-rata
distribution of net income to limited partnership units, as well as to Cantor for its
noncontrolling interest. The amount of this net income, and therefore of these payments per unit, would be determined using the above definition of
pre-tax
Adjusted Earnings using the fully diluted share
count. The declaration, payment, timing and amount of any future dividends payable by the Company will be at the discretion of its board of directors using the fully diluted share count.
Other Matters with Respect to Newmarks Adjusted Earnings
The term Adjusted Earnings should not be considered in isolation or as an alternative to GAAP net income (loss). The Company views Adjusted
Earnings as a metric that is not indicative of liquidity or the cash available to fund its operations, but rather as a performance measure.
Pre-
and
post-tax
Adjusted
Earnings are not intended to replace the Companys presentation of its GAAP financial results. However, management believes that these measures help provide investors with a clearer understanding of Newmarks financial performance and
offer useful information to both management and investors regarding certain financial and business trends related to the Companys financial condition and results of operations. Management believes that Adjusted Earnings measures and the GAAP
measures of financial performance should be considered together.
Newmark anticipates providing forward-looking guidance for GAAP revenues and for certain
Adjusted Earnings measures from time to time. However, the Company does not anticipate providing an outlook for GAAP results other than revenue. This is because certain GAAP items, which are excluded from Adjusted Earnings, are difficult to forecast
with precision before the end of each period. The Company therefore believes that it is not possible to forecast GAAP results or to quantitatively reconcile GAAP results to
non-GAAP
results with sufficient
precision unless Newmark makes unreasonable efforts. The items that are difficult to predict on a quarterly basis with precision and which can have a material impact on the Companys GAAP results include, but are not limited, to the following:
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Allocations of net income and grants of exchangeability to limited partnership units, which are determined at the discretion of management throughout and up to the
period-end;
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The impact of certain marketable securities, as well as any gains or losses related to associated
mark-to-
market movements and/or hedging
including with respect to the Nasdaq Forward. These items are calculated using
period-end
closing prices;
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Non-cash
asset impairment charges, which are calculated and analyzed based on the
period-end
values of the underlying assets. These amounts
may not be known until after
period-end;
and
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Acquisitions, dispositions and/or resolutions of litigation, which are fluid and unpredictable in nature.
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Newmarks Adjusted EBITDA and Adjusted EBITDA Before Allocations to Units Defined
Newmark provides a non-GAAP financial performance measure, Adjusted EBITDA, which the Company defines as Net income (loss) for fully diluted
shares derived in accordance with GAAP and adjusted for the addition of the following items (the last two items of which are discussed further in section of this documents called Adjustments Made to Calculate Pre-Tax Adjusted
Earnings.)
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Provision (benefit) for income taxes;
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Net income (loss) attributable to noncontrolling interest;
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Employee loan amortization and reserves on employee loans;
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Fixed asset depreciation and intangible asset amortization;
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Non-cash charges relating to grants of exchangeability to limited partnership units;
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Other non-cash charges related to equity-based compensation;
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Other non-cash income (loss); and
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Net non-cash GAAP gains related to OMSRs and MSRs amortization.
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The Company also discloses Adjusted
EBITDA before allocations to units, which is Adjusted EBITDA excluding GAAP charges with respect to allocations of net income to limited partnership units. Such allocations represent the pro-rata portion of pre-tax earnings available to such
unit holders. These units are included in the fully-diluted share count, and are exchangeable on a one-to-one basis, subject to certain adjustments, into shares of Newmarks Class A common stock. As these units are exchanged into shares of
the Companys Class A common stock, unit holders will become entitled to cash dividends paid on the shares of the Class A common stock rather than cash distributions in respect of the units. The Company views such allocations as
economically equivalent to dividends on common shares. Because dividends paid to common shares are not an expense under GAAP, management believes similar allocations of income to unit holders should also be excluded by investors when analyzing
Newmarks results on a fully-diluted basis with respect to Adjusted EBITDA.
The Companys management believes that these Adjusted EBITDA
measures are useful in evaluating Newmarks operating performance, because the calculations of these measures generally eliminate the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which
would include impairment charges of goodwill and intangibles created from acquisitions. Such items may vary for different companies for reasons unrelated to overall operating performance. As a result, the Companys management uses these
measures to evaluate operating performance and for other discretionary purposes. Newmark believes that these Adjusted EBITDA measures are useful to investors to assist them in achieving a more complete picture of the Companys financial
condition and results of operations.
Because these Adjusted EBITDA measures are not recognized measurements under GAAP, investors should use these
measures in addition to Net income (loss) for fully diluted shares when analyzing Newmarks operating performance. Because not all companies use identical Adjusted EBITDA calculations, the Companys presentation of these
Adjusted EBITDA measures may not be comparable to similarly-titled measures of other companies. Furthermore, these Adjusted EBITDA measures are not intended to be measures of free cash flow or GAAP cash flow from operations, because these Adjusted
EBITDA measures do not consider certain cash requirements, such as tax and debt service payments.
Discussion of Forward-Looking Statements
Statements contained or incorporated by reference herein regarding Newmark, Newmark OpCo, Newmark SPV, the Newmark OpCo Preferred Investment or
the Forward that are not historical facts are forward-looking statements that involve risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements. Except as required by law,
Newmark and BGC undertake no obligation to update any forward-looking statements. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see
Newmarks and BGCs Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in these filings and any updates to such risk factors contained in subsequent
Forms 10-K, Forms 10-Q or
Forms 8-K.