SEC Filing | Focus Financial Partners

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-38604

Focus Financial Partners Inc.
(Exact Name of Registrant as Specified in its Charter)

Delaware	47-4780811
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

875 Third Avenue, 28th Floor New York, NY	10022
(Address of Principal Executive Offices)	(Zip Code)

(646) 519-2456

(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
Class A common stock, par value $0.01 per share		FOCS		Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

Large accelerated filer ☒	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 ☐ No ☒

As of May 4, 2020, the registrant had 47,806,195 shares of Class A common stock and 21,759,379 shares of Class B common stock outstanding.

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FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020


		Page No.
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Unaudited condensed consolidated balance sheets	2
	Unaudited condensed consolidated statements of operations	3
	Unaudited condensed consolidated statements of comprehensive income (loss)	4
	Unaudited condensed consolidated statements of cash flows	5
	Unaudited condensed consolidated statements of changes in shareholders’ equity	6
	Notes to unaudited condensed consolidated financial statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	40
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
SIGNATURES		43

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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
Cash and cash equivalents	$	65,178	$	233,039
Accounts receivable less allowances of $684 at 2019 and $904 at 2020		129,337		139,502
Prepaid expenses and other assets		58,581		60,256
Fixed assets—net		41,634		41,838
Operating lease assets		180,114		181,904
Debt financing costs—net		9,645		8,971
Deferred tax assets—net		75,453		72,617
Goodwill		1,090,231		1,111,780
Other intangible assets—net		1,003,456		998,870
TOTAL ASSETS	$	2,653,629	$	2,848,777
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable	$	8,077	$	9,655
Accrued expenses		41,442		39,419
Due to affiliates		58,600		16,366
Deferred revenue		7,839		10,449
Other liabilities		215,878		170,773
Operating lease liabilities		196,425		199,307
Borrowings under credit facilities (stated value of $1,279,188 and $1,526,296 at December 31, 2019 and March 31, 2020, respectively)		1,272,999		1,525,687
Tax receivable agreements obligations		48,399		50,075
TOTAL LIABILITIES		1,849,659		2,021,731
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY
Class A common stock, par value $0.01, 500,000,000 shares authorized; 47,421,315 and 47,807,029 shares issued and outstanding at December 31, 2019 and March 31, 2020, respectively		474		478
Class B common stock, par value $0.01, 500,000,000 shares authorized; 22,075,749 and 21,759,379 shares issued and outstanding at December 31, 2019 and March 31, 2020, respectively		221		218
Additional paid-in capital		498,186		520,281
Retained earnings (deficit)		(13,462)		6,934
Accumulated other comprehensive loss		(1,299)		(8,746)
Total shareholders' equity		484,120		519,165
Non-controlling interest		319,850		307,881
Total equity		803,970		827,046
TOTAL LIABILITIES AND EQUITY	$	2,653,629	$	2,848,777

See notes to unaudited condensed consolidated financial statements

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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:
Wealth management fees	$	243,084	$	318,603
Other		16,840		18,451
Total revenues		259,924		337,054
OPERATING EXPENSES:
Compensation and related expenses		101,448		117,844
Management fees		57,006		83,693
Selling, general and administrative		52,257		62,595
Management contract buyout		1,428		—
Intangible amortization		28,741		35,723
Non-cash changes in fair value of estimated contingent consideration		7,414		(31,373)
Depreciation and other amortization		2,313		2,982
Total operating expenses		250,607		271,464
INCOME FROM OPERATIONS		9,317		65,590
OTHER INCOME (EXPENSE):
Interest income		197		285
Interest expense		(12,859)		(13,586)
Amortization of debt financing costs		(782)		(782)
Loss on extinguishment of borrowings		—		(6,094)
Other (expense) income—net		(236)		612
Income from equity method investments		314		64
Total other expense—net		(13,366)		(19,501)
INCOME (LOSS) BEFORE INCOME TAX		(4,049)		46,089
INCOME TAX EXPENSE (BENEFIT)		(1,221)		12,070
NET INCOME (LOSS)		(2,828)		34,019
Non-controlling interest		(114)		(13,623)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(2,942)	$	20,396
Income (loss) per share of Class A common stock:
Basic	$	(0.06)	$	0.43
Diluted	$	(0.06)	$	0.43
Weighted average shares of Class A common stock outstanding:
Basic		46,211,599		47,436,555
Diluted		46,211,599		47,441,172

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of comprehensive income (loss)

(In thousands)


	For the three months ended
	March 31,
	2019		2020
Net income (loss)	$	(2,828)	$	34,019
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		354		(8,565)
Unrealized loss on interest rate swap designated as a cash flow hedge		—		(2,944)
Comprehensive income (loss)		(2,474)		22,510
Less: Comprehensive income attributable to noncontrolling interest		(238)		(9,561)
Comprehensive income (loss) attributable to common shareholders	$	(2,712)	$	12,949

See notes to unaudited condensed consolidated financial statements

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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:
Net income (loss)	$	(2,828)	$	34,019
Adjustments to reconcile net income (loss) to net cash provided by operating activities—net of effect of acquisitions:
Intangible amortization		28,741		35,723
Depreciation and other amortization		2,313		2,982
Amortization of debt financing costs		782		782
Non-cash equity compensation expense		3,921		5,034
Non-cash changes in fair value of estimated contingent consideration		7,414		(31,373)
Income from equity method investments		(314)		(64)
Distributions received from equity method investments		263		25
Deferred taxes and other non-cash items		(575)		4,104
Loss on extinguishment of borrowings		—		6,094
Changes in cash resulting from changes in operating assets and liabilities:
Accounts receivable		(20,690)		(9,047)
Prepaid expenses and other assets		(5,788)		(1,705)
Accounts payable		4,662		1,281
Accrued expenses		3,741		(1,612)
Due to affiliates		1,723		(41,785)
Other liabilities		(7,537)		(2,815)
Deferred revenue		85		1,739
Net cash provided by operating activities		15,913		3,382
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions and contingent consideration—net of cash acquired		(203,394)		(52,188)
Purchase of fixed assets		(1,875)		(3,188)
Net cash used in investing activities		(205,269)		(55,376)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities		295,000		285,000
Repayments of borrowings under credit facilities		(47,007)		(37,892)
Contingent consideration paid		(7,649)		(21,428)
Payments of debt financing costs		—		(634)
Proceeds from exercise of stock options		214		77
Payments on finance lease obligations		(57)		(34)
Distributions for unitholders		(596)		(4,567)
Net cash provided by financing activities		239,905		220,522
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		17		(667)
CHANGE IN CASH AND CASH EQUIVALENTS		50,566		167,861
CASH AND CASH EQUIVALENTS:
Beginning of period		33,213		65,178
End of period	$	83,779	$	233,039

See Note 13 for supplemental cash flow disclosure

See notes to unaudited condensed consolidated financial statements

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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	46,265,903	$	462		22,823,272	$	228	$	471,386	$	(590)	$	(1,824)	$	469,662	$	342,858	$	812,520
Net loss	—		—		—		—		—		(2,942)		—		(2,942)		114		(2,828)
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	254,441		3		(254,441)		(3)		9,267		—		—		9,267		—		9,267
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	149,271		2		—		—		5,435		—		—		5,437		—		5,437
Forfeiture of unvested Class A common stock	(909)		—		—		—		(30)		—		—		(30)		—		(30)
Exercise of stock options	6,477		—		—		—		214				—		214		—		214
Change in non-controlling interest allocation	—								(28,347)		—		—		(28,347)		14,126		(14,221)
Non-cash equity compensation expenses	—		—		—		—		705		—		—		705		—		705
Currency translation adjustment-net of tax	—								—		—		230		230		124		354
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		858		—		—		858		—		858
Balance at March 31, 2019	46,675,183	$	467		22,568,831	$	225	$	459,488	$	(3,532)	$	(1,594)	$	455,054	$	357,222	$	812,276

Balance at January 1, 2020	47,421,315	$	474		22,075,749	$	221	$	498,186	$	(13,462)	$	(1,299)	$	484,120	$	319,850	$	803,970
Net income	—		—		—		—		—		20,396		—		20,396		13,623		34,019
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	316,370		3		(316,370)		(3)		6,036		—		—		6,036		—		6,036
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	66,631		1		—		—		1,271		—		—		1,272		—		1,272
Exercise of stock options	2,713		—		—		—		77		—		—		77		—		77
Change in non-controlling interest allocation	—		—		—		—		14,087		—		—		14,087		(21,530)		(7,443)
Non-cash equity compensation expenses	—		—		—		—		1,017		—		—		1,017		—		1,017
Currency translation adjustment-net of tax	—		—		—		—		—		—		(5,524)		(5,524)		(3,041)		(8,565)
Unrealized loss on interest rate swap designated as a cash flow hedge- net of tax	—		—		—		—		—		—		(1,923)		(1,923)		(1,021)		(2,944)
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		(393)		—		—		(393)		—		(393)
Balance at March 31, 2020	47,807,029	$	478		21,759,379	$	218	$	520,281	$	6,934	$	(8,746)	$	519,165	$	307,881	$	827,046

See notes to unaudited condensed consolidated financial statements

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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

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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	$	254,292	$	321,983
International revenue		5,632		15,071
Total revenue	$	259,924	$	337,054

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.

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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	22,568,831		21,759,379
Common unit equivalents of outstanding vested and unvested incentive units held by continuing owners(1)	7,614,402		3,623,660
Total common units and common unit equivalents attributable to non-controlling interest	30,183,233		25,383,039
Total common units and common unit equivalents of incentive units outstanding	76,858,416		73,190,068
Non-controlling interest allocation	39.3	%	34.7	%
Company’s interest in Focus LLC	60.7	%	65.3	%

(1)

Focus LLC common units issuable upon conversion of 18,048,706 and 19,369,928 (see Note 9) vested and unvested Focus LLC incentive units outstanding as of March 31, 2019 and 2020, respectively, was calculated using the common unit equivalent of vested and unvested Focus LLC incentive units based on the closing price of the Company’s Class A common stock on the last trading day of the periods.

The below table contains a reconciliation of net income (loss) to net income (loss) attributable to common shareholders:



	Three Months Ended
	March 31,
	2019		2020
Net income (loss)	$	(2,828)	$	34,019
Non-controlling interest		(114)		(13,623)
Net income (loss) attributable to common shareholders	$	(2,942)	$	20,396

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	$	(2,942)	$	20,396
Weighted average shares of Class A common stock outstanding		46,211,599		47,436,555
Basic income (loss) per share	$	(0.06)	$	0.43

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

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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:
Net income (loss) attributable to common shareholders	$	(2,942)	$	20,396
Weighted average shares of Class A common stock outstanding		46,211,599		47,436,555
Effect of dilutive stock options		—		2,573
Effect of dilutive unvested Class A common stock and restricted stock units		—		2,044
Total		46,211,599		47,441,172
Diluted income (loss) per share	$	(0.06)	$	0.43

Diluted loss per share for the three months ended March 31, 2019 excludes incremental shares of 7,855 related to unvested Class A common stock since the effect would be antidilutive. Diluted income (loss) per share for the three months ended March 31, 2019 and 2020 excludes shares related to 155,000 market-based stock options that vest on the fifth anniversary of the pricing of the Company’s IPO if the volume weighted average per share price for any ninety-calendar day period within such five-year period immediately following the pricing of the IPO reaches at least $100. Such market-based criteria were not met at March 31, 2019 and 2020.

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

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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		3
Consideration:
Cash due at closing	$	53,274
Estimated working capital adjustment		(763)
Fair market value of estimated contingent consideration		3,367
Total consideration	$	55,878
Allocation of purchase price:
Total tangible assets	$	4,142
Total liabilities assumed		(10,800)
Customer relationships		34,849
Management contracts		972
Goodwill		26,545
Other acquired intangibles		170
Total allocated consideration	$	55,878

Management believes approximately $32,379 of tax goodwill and intangibles related to business acquisitions completed during the three months ended March 31, 2020 will be deductible for tax purposes over a 15 year period. Additional tax goodwill may be deductible when estimated contingent consideration is earned and paid.

The accompanying unaudited condensed consolidated statement of operations for three months ended March 31, 2020 includes revenue and income from operations for the one business acquisition that is a new subsidiary partner firm from the date it was acquired of $1,245 and $353, respectively.

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 two asset acquisitions during the three months ended March 31, 2020. Total purchase consideration for asset acquisitions during the three months ended March 31, 2020 consisted of contingent consideration the amount of which will be determined when the outcome is determinable.

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		20
Customer relationships		9
Other acquired intangibles		5
Weighted-average useful life of all intangibles acquired		9

From April 1, 2020 to May 7, 2020, the Company completed one business acquisition for cash of $5,225, plus contingent consideration.

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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	$	883,119	$	1,112,855
Cumulative impairment losses		(22,624)		(22,624)
		860,495		1,090,231
Goodwill acquired		229,799		26,545
Other		(63)		(4,996)
		229,736		21,549
Balance end of period:
Goodwill		1,112,855		1,134,404
Cumulative impairment losses		(22,624)		(22,624)
	$	1,090,231	$	1,111,780

The following table summarizes the amortizing acquired intangible assets at December 31, 2019:


	Gross Carry		Accumulated		Net Book
	Amount		Amortization		Value
Customer relationships	$	1,362,104	$	(471,361)	$	890,743
Management contracts		150,464		(39,888)		110,576
Other acquired intangibles		5,157		(3,020)		2,137
Total	$	1,517,725	$	(514,269)	$	1,003,456

The following table summarizes the amortizing acquired intangible assets at March 31, 2020:


	Gross Carry		Accumulated		Net Book
	Amount		Amortization		Value
Customer relationships	$	1,390,984	$	(503,469)	$	887,515
Management contracts		151,010		(41,785)		109,225
Other acquired intangibles		5,351		(3,221)		2,130
Total	$	1,547,345	$	(548,475)	$	998,870

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.

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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	$	1,139,188	$	1,146,307	$	1,136,296	$	1,062,437

Derivatives

At March 31, 2020, the fair value of the Company’s $400,000 notional amount interest rate swap agreement was $(3,573). The fair value was based on Level 2 inputs which included the relevant interest rate forward curves.

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	$	98,905
Additions to estimated contingent consideration		82,781
Payments of contingent consideration		(36,862)
Non-cash changes in fair value of estimated contingent consideration		38,797
Other		(53)
Balance at December 31, 2019	$	183,568
Additions to estimated contingent consideration		3,367
Payments of contingent consideration		(29,772)
Non-cash changes in fair value of estimated contingent consideration		(31,373)
Other		(1,623)
Balance at March 31, 2020	$	124,167

Estimated contingent consideration is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets.

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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 $36,862 in cash as contingent consideration associated with business acquisitions. During the three months ended March 31, 2020, the Company paid $29,772 in cash as contingent consideration associated with business acquisitions. In addition, the Company also paid $365 and $382 of contingent consideration for the three months ended March 31, 2019 and 2020, respectively, associated with asset acquisitions. These amounts are included in cash paid for acquisitions and contingent consideration—net of cash acquired in investing activities in the unaudited condensed consolidated statement of cash flows.

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
$	183,568	Monte Carlo Simulation Model	Forecasted growth rates	(10.7)% - 51.1	%
			Discount rates	11% - 17	%


		Quantitative Information About Level 3
		Fair Value Measurements
Fair Value at		Valuation	Unobservable
March 31, 2020		Techniques	Inputs	Ranges
$	124,217	Monte Carlo Simulation Model	Forecasted growth rates	(32.1)% - 26.6	%
			Discount rates	8% - 20%	%

7. CREDIT FACILITY

As of March 31, 2020, Focus LLC’s credit facility (the “Credit Facility”) consisted of a $1,153,000 first lien term loan (the “First Lien Term Loan”) and a $650,000 first lien revolving credit facility (the “First Lien Revolver”).

The First Lien Term Loan has a maturity date of July 2024 and requires quarterly installment repayments of $2,891 . In January 2020, Focus LLC amended its First Lien Term Loan to reduce the interest rates. The First Lien Term Loan bears interest (at Focus LLC’s option) at: (i) LIBOR plus a margin of 2.00% or (ii) the lender’s Base Rate (as defined in the Credit Facility) plus a margin of 1.00%. As a result of the amendment, Focus LLC paid approximately $634 in debt financing costs and recorded a loss on extinguishment of borrowings of $6,094, representing the write off of $5,306 and $788 in deferred financing costs and unamortized discount related to the First Lien Term Loan, respectively.

The First Lien Revolver has a maturity date of July 2023. Up to $30,000 of the First Lien Revolver is available for the issuance of letters of credit, subject to certain limitations. The First Lien Revolver bears interest (at Focus LLC’s

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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 2.00% with step downs to 1.75%, 1.50% and 1.25% or the lender’s Base Rate plus a margin of 1.00% with step downs to 0.75%, 0.50% and 0.25%, based on achievement of a specified First Lien Leverage Ratio. The First Lien Revolver unused commitment fee is 0.50% with step downs to 0.375% and 0.25% based on achievement of a specified First Lien Leverage Ratio.

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 6.25:1.00 as of the last day of each fiscal quarter. At March 31, 2020, Focus LLC's First Lien Leverage Ratio was 4.00:1.00, which satisfied the maximum ratio of 6.25:1.00. First Lien Leverage Ratio means the ratio of amounts outstanding under the First Lien Term Loan and First Lien Revolver plus other outstanding debt obligations secured by a lien on the assets of Focus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted cash and cash equivalents to Consolidated EBITDA (as defined in the Credit Facility). Consolidated EBITDA for purposes of the Credit Facility was $323,333 at March 31, 2020. Focus LLC is also subject on an annual basis to contingent principal payments based on an excess cash flow calculation (as defined in the Credit Facility) for any fiscal year if the First Lien Leverage Ratio exceeds 3.75:1.00. No contingent principal payments were required to be made in 2019. Based on the excess cash flow calculation for the year ended December 31, 2019, no contingent principal payments are required to be made in 2020.

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	$	1,139,188	$	1,136,296
First Lien Revolver		140,000		390,000
Unamortized debt financing costs		(5,389)		(609)
Unamortized discount		(800)		—
Total	$	1,272,999	$	1,525,687

At December 31, 2019 and March 31, 2020, unamortized debt financing costs associated with the First Lien Revolver of $9,645 and $8,971, respectively, were recorded in debt financing costs-net in the condensed consolidated balance sheets.

Weighted-average interest rates for outstanding borrowings were approximately 5% for the year ended December 31, 2019 and approximately 4% for the three months ended March 31, 2020.

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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 $502,962 and $252,667, respectively.

As of December 31, 2019 and March 31, 2020, Focus LLC was contingently obligated for letters of credit in the amount of $7,038 and $7,333, respectively, each bearing interest at an annual rate of approximately