UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the Quarterly Period Ended
OR
Commission File No.
(Exact Name of Registrant as Specified in its Charter) | |
(State or Other Jurisdiction | (I.R.S. Employer |
(Address of Principal Executive Offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes
As of May 4, 2020, the registrant had
FOCUS FINANCIAL PARTNERS INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated balance sheets
(In thousands, except share and per share amounts)
| December 31, |
| March 31, | |||
2019 | 2020 | |||||
ASSETS |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable less allowances of $ |
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Prepaid expenses and other assets |
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Fixed assets—net |
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Operating lease assets | | | ||||
Debt financing costs—net |
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Deferred tax assets—net | | | ||||
Goodwill |
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Other intangible assets—net |
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TOTAL ASSETS | $ | | $ | | ||
LIABILITIES AND EQUITY |
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LIABILITIES |
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Accounts payable | $ | | $ | | ||
Accrued expenses |
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Due to affiliates |
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Deferred revenue |
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Other liabilities |
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Operating lease liabilities | | | ||||
Borrowings under credit facilities (stated value of $ |
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Tax receivable agreements obligations | | | ||||
TOTAL LIABILITIES |
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COMMITMENTS AND CONTINGENCIES (Note 12) |
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EQUITY | ||||||
Class A common stock, par value $ | | | ||||
Class B common stock, par value $ | | | ||||
Additional paid-in capital | | | ||||
Retained earnings (deficit) | ( | | ||||
Accumulated other comprehensive loss | ( | ( | ||||
Total shareholders' equity | | | ||||
Non-controlling interest | | | ||||
Total equity | | | ||||
TOTAL LIABILITIES AND EQUITY | $ | | $ | |
See notes to unaudited condensed consolidated financial statements
2
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of operations
(In thousands, except share and per share amounts)
For the three months ended | |||||||
March 31, | |||||||
| 2019 |
| 2020 | ||||
REVENUES: |
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Wealth management fees | $ | | $ | | |||
Other |
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Total revenues |
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OPERATING EXPENSES: |
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Compensation and related expenses |
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Management fees |
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Selling, general and administrative |
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Management contract buyout | | — | |||||
Intangible amortization |
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Non-cash changes in fair value of estimated contingent consideration |
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| ( |
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Depreciation and other amortization |
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Total operating expenses |
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INCOME FROM OPERATIONS |
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OTHER INCOME (EXPENSE): |
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Interest income |
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Interest expense |
| ( |
| ( |
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Amortization of debt financing costs |
| ( |
| ( |
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Loss on extinguishment of borrowings |
| — |
| ( |
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Other (expense) income—net |
| ( |
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Income from equity method investments | | | |||||
Total other expense—net |
| ( |
| ( |
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INCOME (LOSS) BEFORE INCOME TAX |
| ( |
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INCOME TAX EXPENSE (BENEFIT) |
| ( |
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NET INCOME (LOSS) | ( | | |||||
Non-controlling interest | ( | ( | |||||
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | $ | | |||
Income (loss) per share of Class A common stock: | |||||||
Basic | $ | ( | $ | | |||
Diluted | $ | ( | $ | | |||
Weighted average shares of Class A common stock outstanding: | |||||||
Basic | | | |||||
Diluted | | |
See notes to unaudited condensed consolidated financial statements
3
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of comprehensive income (loss)
(In thousands)
For the three months ended |
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March 31, | |||||||
| 2019 |
| 2020 |
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Net income (loss) | $ | ( | $ | | |||
Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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| ( | |||
Unrealized loss on interest rate swap designated as a cash flow hedge | — | ( | |||||
Comprehensive income (loss) | ( | | |||||
Less: Comprehensive income attributable to noncontrolling interest | ( | ( | |||||
Comprehensive income (loss) attributable to common shareholders | $ | ( | $ | |
See notes to unaudited condensed consolidated financial statements
4
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of cash flows
(In thousands)
For the three months ended | ||||||
March 31, | ||||||
| 2019 |
| 2020 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) | $ | ( | $ | | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities—net of effect of acquisitions: |
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Intangible amortization |
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Depreciation and other amortization |
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Amortization of debt financing costs |
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Non-cash equity compensation expense |
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Non-cash changes in fair value of estimated contingent consideration |
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| ( | ||
Income from equity method investments |
| ( |
| ( | ||
Distributions received from equity method investments |
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Deferred taxes and other non-cash items |
| ( |
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Loss on extinguishment of borrowings |
| — |
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Changes in cash resulting from changes in operating assets and liabilities: |
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Accounts receivable |
| ( |
| ( | ||
Prepaid expenses and other assets |
| ( |
| ( | ||
Accounts payable |
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Accrued expenses |
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| ( | ||
Due to affiliates |
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| ( | ||
Other liabilities |
| ( |
| ( | ||
Deferred revenue |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Cash paid for acquisitions and contingent consideration—net of cash acquired |
| ( |
| ( | ||
Purchase of fixed assets |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings under credit facilities |
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Repayments of borrowings under credit facilities |
| ( |
| ( | ||
Contingent consideration paid |
| ( |
| ( | ||
Payments of debt financing costs |
| — |
| ( | ||
Proceeds from exercise of stock options | | | ||||
Payments on finance lease obligations | ( | ( | ||||
Distributions for unitholders |
| ( |
| ( | ||
Net cash provided by financing activities |
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EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
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| ( | ||
CHANGE IN CASH AND CASH EQUIVALENTS |
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CASH AND CASH EQUIVALENTS: |
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Beginning of period |
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End of period | $ | | $ | |
See Note 13 for supplemental cash flow disclosure
See notes to unaudited condensed consolidated financial statements
5
FOCUS FINANCIAL PARTNERS INC.
Unaudited condensed consolidated statements of changes in shareholders’ equity
Three months ended March 31, 2019 and 2020
(In thousands, except share amounts)
Accumulated | |||||||||||||||||||||||||||||
Class A | Class B | Additional | Retained | Other | Total | ||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Earnings | Comprehensive | Shareholders’ | Non-controlling | |||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| (Deficit) |
| Loss |
| Equity |
| Interest |
| Total Equity | ||||||||||
Balance at January 1, 2019 | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||||||
Net loss | — | — | — | — | — | ( | — | ( | | ( | |||||||||||||||||||
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | | ( | ( | | — | — | | — | | |||||||||||||||||||
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights | | | — | — | | — | — | | — | | |||||||||||||||||||
Forfeiture of unvested Class A common stock | ( | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||
Exercise of stock options | | — | — | — | |
| — | | — | | |||||||||||||||||||
Change in non-controlling interest allocation | — | ( | — | — | ( | | ( | ||||||||||||||||||||||
Non-cash equity compensation expenses | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Currency translation adjustment-net of tax | — | — | — | | | | | ||||||||||||||||||||||
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Balance at March 31, 2019 | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||||||
Balance at January 1, 2020 | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||||||
Net income | — | — | — | — | — | | — | | | | |||||||||||||||||||
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights | | | ( | ( | | — | — | | — | | |||||||||||||||||||
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights | | | — | — | | — | — | | — | | |||||||||||||||||||
Exercise of stock options | | — | — | — | | — | — | | — | | |||||||||||||||||||
Change in non-controlling interest allocation | — | — | — | — | | — | — | | ( | ( | |||||||||||||||||||
Non-cash equity compensation expenses | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Currency translation adjustment-net of tax | — | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||
Unrealized loss on interest rate swap designated as a cash flow hedge- net of tax | — | — | — | — | — | — | ( | ( | ( | ( | |||||||||||||||||||
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||
Balance at March 31, 2020 | | $ | | | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | |
See notes to unaudited condensed consolidated financial statements
6
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements
(In thousands, except unit data, share and per share amounts)
1. GENERAL
Organization and Business— Focus Financial Partners Inc. (the “Company”) was formed as a Delaware corporation on July 29, 2015 for the sole purpose of completing the initial public offering (“IPO”) and reorganization transactions (“ Reorganization Transactions”) in order to carry on the business of Focus Financial Partners, LLC (“Focus LLC’) and its subsidiaries. On July 30, 2018, the Company became the managing member of Focus LLC and operates and controls the businesses and affairs of Focus LLC and its subsidiaries.
Focus LLC is a Delaware limited liability company that was formed in November 2004. Focus LLC’s subsidiaries commenced revenue-generating and acquisition activities in January 2006. Focus LLC’s activities are governed by its Fourth Amended and Restated Operating Agreement (as amended, the “Operating Agreement”).
Focus LLC is in the business of acquiring and overseeing independent fiduciary wealth management and related businesses.
2. SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for fair presentation have been included. The unaudited condensed consolidated financial statements include the accounts of the Company and its majority and wholly owned subsidiaries. The Company consolidates Focus LLC and its subsidiaries’ financial statements and records the interests in Focus LLC consisting of common units and the common unit equivalent of incentive units of Focus LLC that the Company does not own as non-controlling interests, (see Note 3). Intercompany transactions and balances have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 25, 2020.
Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Use of Estimates—The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
The Company disaggregates revenue by wealth management fees and other. The Company does not allocate revenue by the type of service provided in connection with providing holistic wealth management client services. The Company generally manages its business based on the operating results of the enterprise taken as a whole, not by
7
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
geographic region. The following table disaggregates the revenues based on the location of the partner firm legal entities that generates the revenues and therefore may not be reflective of the geography in which clients are located.
Three Months Ended | |||||||
March 31, | |||||||
| 2019 |
| 2020 | ||||
Domestic revenue | $ | | $ | | |||
International revenue |
| |
| | |||
Total revenue | $ | | $ | |
International revenue consists of revenue generated by partner firm legal entities in the United Kingdom, Canada and Australia.
Derivatives
The Company may occasionally use derivative instruments for purposes other than trading. Derivative instruments are accounted for in accordance with Accounting Standard Codification (“ASC”) Topic No. 815, Derivatives and Hedging, which requires that all derivative instruments be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that qualify as hedges and have been designated as part of a hedging relationship for accounting purposes do not impact earnings until the hedged item is recognized in earnings. The Company uses interest rate swaps to manage its mix of fixed and floating rate debt. These instruments have been designated as cash flow hedges at inception and are measured for effectiveness both at inception and on an ongoing basis.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU No. 2017-04 was effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of ASU No. 2017-04 on January 1, 2020 did not have a material effect on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the impacts of the provisions of ASU No. 2019-12 on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London InterBank Offered Rate (“LIBOR”) or another rate that is expected to be discontinued. The amendments in the ASU No. 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of ASU No. 2020-04 did not have a material impact on the Company’s consolidated financial statements; however the Company will continue to evaluate the impacts, if any, of the provisions of ASU No. 2020-04 on the Company’s debt and hedging arrangements through December 31, 2022.
8
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
3. NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE
The calculation of controlling and non-controlling interest is as follows as of March 31, 2019 and 2020:
| 2019 | 2020 | ||||
Focus LLC common units held by continuing owners |
| | | |||
Common unit equivalents of outstanding vested and unvested incentive units held by continuing owners(1) | | | ||||
Total common units and common unit equivalents attributable to non-controlling interest | | | ||||
Total common units and common unit equivalents of incentive units outstanding | | | ||||
Non-controlling interest allocation | | % | | % | ||
Company’s interest in Focus LLC | | % | | % |
(1) | Focus LLC common units issuable upon conversion of |
The below table contains a reconciliation of net income (loss) to net income (loss) attributable to common shareholders:
|
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Three Months Ended | ||||||||
| March 31, | |||||||
2019 |
| 2020 |
| |||||
Net income (loss) | $ | ( | $ | | ||||
Non-controlling interest |
| ( |
| ( | ||||
Net income (loss) attributable to common shareholders | $ | ( | $ | |
The calculation of basic and diluted income (loss) per share is described below:
Basic income (loss) per share is calculated utilizing net income (loss) attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periods:
Three Months Ended | |||||||
| March 31, | ||||||
2019 |
| 2020 | |||||
Basic income (loss) per share: |
|
| |||||
Net income (loss) attributable to common shareholders | $ | ( | $ | | |||
Weighted average shares of Class A common stock outstanding |
| |
| | |||
Basic income (loss) per share | $ | ( | $ | |
Diluted income (loss) per share is calculated utilizing net income (loss) attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periods plus
9
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
the effect, if any, of the potentially dilutive shares of the Company’s Class A common stock from stock options, unvested Class A common stock and restricted stock units as calculated using the treasury stock method:
Three Months Ended | ||||||
March 31, | ||||||
| 2019 |
| 2020 | |||
Diluted income (loss) per share: |
|
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Net income (loss) attributable to common shareholders | $ | ( | $ | | ||
Weighted average shares of Class A common stock outstanding |
| |
| | ||
Effect of dilutive stock options | — | | ||||
Effect of dilutive unvested Class A common stock and restricted stock units | — | | ||||
Total |
| |
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Diluted income (loss) per share | $ | ( | $ | |
Diluted loss per share for the three months ended March 31, 2019 excludes incremental shares of
Focus LLC common and incentive units may be exchanged for the Company’s Class A common stock, subject to certain limitations (see Note 9). Such exchange is not reflected in diluted income (loss) per share as the assumed exchange is not dilutive.
4. ACQUISITIONS
Business Acquisitions
Business acquisitions are accounted for in accordance with ASC Topic 805: Business Combinations.
The Company has incorporated contingent consideration, or earn out provisions, into the structure of its acquisitions. The Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of the consideration transferred in the exchange. The contingent consideration is remeasured to fair value at each
10
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
reporting date until the contingency is resolved. The purchase price associated with business acquisitions and the allocation thereof during the three months ended March 31, 2020 is as follows:
Number of business acquisitions closed |
| | |
Consideration: | |||
Cash due at closing | $ | | |
Estimated working capital adjustment | ( | ||
Fair market value of estimated contingent consideration | | ||
Total consideration | $ | | |
Allocation of purchase price: | |||
Total tangible assets | $ | | |
Total liabilities assumed | ( | ||
Customer relationships | | ||
Management contracts | | ||
Goodwill | | ||
Other acquired intangibles | | ||
Total allocated consideration | $ | |
Management believes approximately $
The accompanying unaudited condensed consolidated statement of operations for three months ended March 31, 2020 includes revenue and income from operations for the
Asset Acquisitions
The Company also separately purchases customer relationships and other intangible assets. These purchases are accounted for as asset acquisitions as they do not qualify as business acquisitions pursuant to ASC Topic 805, Business Combinations. There were
The weighted-average useful lives of intangible assets acquired during the three months ended March 31, 2020 through business acquisitions and asset acquisitions are as follows:
Number of | ||
| Years | |
Management contracts | ||
Customer relationships | ||
Other acquired intangibles | ||
Weighted-average useful life of all intangibles acquired |
From April 1, 2020 to May 7, 2020, the Company completed
11
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the change in the goodwill balances for the year ended December 31, 2019 and the three months ended March 31, 2020:
| December 31, |
| March 31, | |||
2019 | 2020 | |||||
Balance beginning of period: | ||||||
Goodwill | $ | | $ | | ||
Cumulative impairment losses |
| ( | ( | |||
| | |||||
Goodwill acquired |
| | | |||
Other |
| ( | ( | |||
| | | ||||
Balance end of period: | ||||||
Goodwill |
| | | |||
Cumulative impairment losses |
| ( | ( | |||
$ | | $ | |
The following table summarizes the amortizing acquired intangible assets at December 31, 2019:
Gross Carry | Accumulated | Net Book | |||||||
| Amount |
| Amortization |
| Value | ||||
Customer relationships | $ | | $ | ( | $ | | |||
Management contracts |
| |
| ( |
| | |||
Other acquired intangibles |
| |
| ( |
| | |||
Total | $ | | $ | ( | $ | |
The following table summarizes the amortizing acquired intangible assets at March 31, 2020:
| Gross Carry |
| Accumulated |
| Net Book | ||||
Amount | Amortization | Value | |||||||
Customer relationships | $ | | $ | ( | $ | | |||
Management contracts |
| |
| ( |
| | |||
Other acquired intangibles |
| |
| ( |
| | |||
Total | $ | | $ | ( | $ | |
6. FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.
12
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1—Unadjusted price quotations in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Significant unobservable inputs that are not corroborated by market data.
First Lien Term Loan
The implied fair value of the Company’s First Lien Term Loan (as defined below) based on Level 2 inputs at December 31, 2019 and March 31, 2020 are as follows:
December 31, 2019 | March 31, 2020 | |||||||||||
| Stated |
| Fair |
| Stated |
| Fair | |||||
Value | Value | Value | Value | |||||||||
First Lien Term Loan | $ | | $ | | $ | | $ | |
Derivatives
At March 31, 2020, the fair value of the Company’s $
Business acquisitions
For business acquisitions, the Company recognizes the fair value of goodwill and other acquired intangible assets, and estimated contingent consideration at the acquisition date as part of purchase price. This fair value measurement is based on unobservable (Level 3) inputs.
The following table represents changes in the fair value of estimated contingent consideration for business acquisitions for the year ended December 31, 2019 and the three months ended March 31, 2020:
Balance at January 1, 2019 |
| $ | |
Additions to estimated contingent consideration | | ||
Payments of contingent consideration | ( | ||
Non-cash changes in fair value of estimated contingent consideration | | ||
Other | ( | ||
Balance at December 31, 2019 | $ | | |
Additions to estimated contingent consideration | | ||
Payments of contingent consideration | ( | ||
Non-cash changes in fair value of estimated contingent consideration | ( | ||
Other | ( | ||
Balance at March 31, 2020 | $ | |
Estimated contingent consideration is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets.
13
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
During the year ended December 31, 2019, the Company paid $
In determining fair value of the estimated contingent consideration, the acquired business’ future performance is estimated using financial projections for the acquired business. These financial projections, as well as alternative scenarios of financial performance, are measured against the performance targets specified in each respective acquisition agreement. In addition, discount rates are established based on the cost of debt and the cost of equity. The Company uses the Monte Carlo Simulation Model to determine the fair value of the Company’s estimated contingent consideration.
The significant unobservable inputs used in the fair value measurement of the Company’s estimated contingent consideration are the forecasted growth rates over the measurement period and discount rates. Significant increases or decreases in the Company’s forecasted growth rates over the measurement period or discount rates would result in a higher or lower fair value measurement.
Inputs used in the fair value measurement of estimated contingent consideration at December 31, 2019 and March 31, 2020 are summarized below:
Quantitative Information About Level 3 |
| |||||||
Fair Value Measurements |
| |||||||
Fair Value at |
| Valuation |
| Unobservable |
|
| ||
December 31, 2019 | Techniques | Inputs | Ranges |
| ||||
$ | | Monte Carlo Simulation Model | Forecasted growth rates | ( | % | |||
% |
Quantitative Information About Level 3 |
| |||||||
Fair Value Measurements |
| |||||||
Fair Value at |
| Valuation |
| Unobservable |
|
| ||
March 31, 2020 | Techniques | Inputs | Ranges |
| ||||
$ | | Monte Carlo Simulation Model | Forecasted growth rates | ( | % | |||
% |
7. CREDIT FACILITY
As of March 31, 2020, Focus LLC’s credit facility (the “Credit Facility”) consisted of a $
The First Lien Term Loan has a maturity date of July 2024 and requires quarterly installment repayments of $
The First Lien Revolver has a maturity date of July 2023. Up to $
14
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
option) at LIBOR plus a margin of
Focus LLC’s obligations under the Credit Facility are collateralized by the majority of Focus LLC’s assets. The Credit Facility contains various customary covenants, including, but not limited to: (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other restricted payments.
Focus LLC is required to maintain a First Lien Leverage Ratio (as defined in the Credit Facility) of not more than
The Company defers and amortizes its debt financing costs over the respective terms of the First Lien Term Loan and First Lien Revolver. The debt financing costs related to the First Lien Term Loan are recorded as a reduction of the carrying amount of the First Lien Term Loan in the unaudited condensed consolidated balance sheets. The debt financing costs related to the First Lien Revolver are recorded in debt financing costs-net in the unaudited condensed consolidated balance sheets.
The following is a reconciliation of principal amounts outstanding under the Credit Facility to borrowings under the Credit Facility recorded in the unaudited condensed consolidated balance sheets at December 31, 2019 and March 31, 2020:
| December 31, |
| March 31, | |||
2019 | 2020 | |||||
First Lien Term Loan | $ | | $ | | ||
First Lien Revolver | | | ||||
Unamortized debt financing costs |
| ( |
| ( | ||
Unamortized discount |
| ( |
| — | ||
Total | $ | | $ | |
At December 31, 2019 and March 31, 2020, unamortized debt financing costs associated with the First Lien Revolver of $
Weighted-average interest rates for outstanding borrowings were approximately
15
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
As of December 31, 2019 and March 31, 2020, the First Lien Revolver available unused commitment line was $
As of December 31, 2019 and March 31, 2020, Focus LLC was contingently obligated for letters of credit in the amount of $