SEC Filing | Focus Financial Partners

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Table of Contents

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 June 30, 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 August 3, 2020, the registrant had 48,105,684 shares of Class A common stock and 21,496,103 shares of Class B common stock outstanding.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 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	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 6.	Exhibits	47
SIGNATURES		48

Table of Contents

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,		June 30,
	2019		2020
ASSETS
Cash and cash equivalents	$	65,178	$	35,329
Accounts receivable less allowances of $684 at 2019 and $997 at 2020		129,337		147,592
Prepaid expenses and other assets		58,581		55,802
Fixed assets—net		41,634		41,660
Operating lease assets		180,114		202,548
Debt financing costs—net		9,645		8,297
Deferred tax assets—net		75,453		76,209
Goodwill		1,090,231		1,121,153
Other intangible assets—net		1,003,456		972,506
TOTAL ASSETS	$	2,653,629	$	2,661,096
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable	$	8,077	$	7,438
Accrued expenses		41,442		50,345
Due to affiliates		58,600		27,173
Deferred revenue		7,839		8,077
Other liabilities		215,878		170,760
Operating lease liabilities		196,425		221,339
Borrowings under credit facilities (stated value of $1,279,188 and $1,293,405 at December 31, 2019 and June 30, 2020, respectively)		1,272,999		1,292,831
Tax receivable agreements obligations		48,399		51,923
TOTAL LIABILITIES		1,849,659		1,829,886
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY
Class A common stock, par value $0.01, 500,000,000 shares authorized; 47,421,315 and 48,091,707 shares issued and outstanding at December 31, 2019 and June 30, 2020, respectively		474		481
Class B common stock, par value $0.01, 500,000,000 shares authorized; 22,075,749 and 21,496,103 shares issued and outstanding at December 31, 2019 and June 30, 2020, respectively		221		215
Additional paid-in capital		498,186		503,209
Retained earnings (deficit)		(13,462)		9,343
Accumulated other comprehensive loss		(1,299)		(8,516)
Total shareholders' equity		484,120		504,732
Non-controlling interest		319,850		326,478
Total equity		803,970		831,210
TOTAL LIABILITIES AND EQUITY	$	2,653,629	$	2,661,096

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of operations

(In thousands, except share and per share amounts)


	For the three months ended				For the six months ended
	June 30,				June 30,
	2019		2020		2019		2020
REVENUES:
Wealth management fees	$	283,296	$	295,119	$	526,380	$	613,722
Other		18,249		17,990		35,089		36,441
Total revenues		301,545		313,109		561,469		650,163
OPERATING EXPENSES:
Compensation and related expenses		105,531		113,914		206,979		231,758
Management fees		79,252		76,987		136,258		160,680
Selling, general and administrative		59,736		52,752		111,993		115,347
Management contract buyout		—		—		1,428		—
Intangible amortization		31,221		36,012		59,962		71,735
Non-cash changes in fair value of estimated contingent consideration		3,847		16,472		11,261		(14,901)
Depreciation and other amortization		2,425		3,029		4,738		6,011
Total operating expenses		282,012		299,166		532,619		570,630
INCOME FROM OPERATIONS		19,533		13,943		28,850		79,533
OTHER INCOME (EXPENSE):
Interest income		339		66		536		351
Interest expense		(14,424)		(10,057)		(27,283)		(23,643)
Amortization of debt financing costs		(782)		(709)		(1,564)		(1,491)
Loss on extinguishment of borrowings		—		—		—		(6,094)
Other (expense) income—net		(468)		70		(704)		682
Income from equity method investments		329		52		643		116
Total other expense—net		(15,006)		(10,578)		(28,372)		(30,079)
INCOME BEFORE INCOME TAX		4,527		3,365		478		49,454
INCOME TAX EXPENSE		1,425		37		204		12,107
NET INCOME		3,102		3,328		274		37,347
Non-controlling interest		(2,306)		(919)		(2,420)		(14,542)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	796	$	2,409	$	(2,146)	$	22,805
Income (loss) per share of Class A common stock:
Basic	$	0.02	$	0.05	$	(0.05)	$	0.48
Diluted	$	0.02	$	0.03	$	(0.05)	$	0.48
Weighted average shares of Class A common stock outstanding:
Basic		46,696,200		47,847,756		46,455,238		47,642,156
Diluted		46,721,559		73,418,108		46,455,238		47,651,057

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				For the six months ended
	June 30,				June 30,
	2019		2020		2019		2020
Net income	$	3,102	$	3,328	$	274	$	37,347
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(687)		5,778		(333)		(2,787)
Unrealized loss on interest rate swap designated as a cash flow hedge		—		(5,383)		—		(8,327)
Comprehensive income (loss)		2,415		3,723		(59)		26,233
Less: Comprehensive income attributable to noncontrolling interest		(2,025)		(1,084)		(2,263)		(10,645)
Comprehensive income (loss) attributable to common shareholders	$	390	$	2,639	$	(2,322)	$	15,588

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)


	For the six months ended
	June 30,
	2019		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	274	$	37,347
Adjustments to reconcile net income to net cash provided by operating activities—net of effect of acquisitions:
Intangible amortization		59,962		71,735
Depreciation and other amortization		4,738		6,011
Amortization of debt financing costs		1,564		1,491
Non-cash equity compensation expense		9,099		10,282
Non-cash changes in fair value of estimated contingent consideration		11,261		(14,901)
Income from equity method investments		(643)		(116)
Distributions received from equity method investments		618		52
Deferred taxes and other non-cash items		843		3,333
Loss on extinguishment of borrowings		—		6,094
Changes in cash resulting from changes in operating assets and liabilities:
Accounts receivable		(18,219)		(15,905)
Prepaid expenses and other assets		3,220		2,780
Accounts payable		389		(981)
Accrued expenses		25,166		7,600
Due to affiliates		(16,518)		(31,225)
Other liabilities		(24,848)		(18,406)
Deferred revenue		(1,688)		(813)
Net cash provided by operating activities		55,218		64,378
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions and contingent consideration—net of cash acquired		(289,101)		(59,000)
Purchase of fixed assets		(10,060)		(5,947)
Net cash used in investing activities		(299,161)		(64,947)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities		370,000		285,000
Repayments of borrowings under credit facilities		(94,014)		(270,783)
Contingent consideration paid		(16,293)		(34,992)
Payments of debt financing costs		—		(634)
Proceeds from exercise of stock options		796		167
Payments on finance lease obligations		(94)		(59)
Distributions for unitholders		(11,734)		(7,643)
Net cash provided by (used in) financing activities		248,661		(28,944)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		13		(336)
CHANGE IN CASH AND CASH EQUIVALENTS		4,731		(29,849)
CASH AND CASH EQUIVALENTS:
Beginning of period		33,213		65,178
End of period	$	37,944	$	35,329

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 June 30, 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 April 1, 2019	46,675,183	$	467		22,568,831	$	225	$	459,488	$	(3,532)	$	(1,594)	$	455,054	$	357,222	$	812,276
Net income	—		—		—		—				796		—		796		2,306		3,102
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	260,385		3		(260,385)		(2)		7,304		—		—		7,305		—		7,305
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	163,600		1		—		—		4,537		—		—		4,538		—		4,538
Exercise of stock options	17,649		—		—		—		582		—				582		—		582
Change in non-controlling interest allocation	—		—		—		—		17,315		—		—		17,315		(28,916)		(11,601)
Non-cash equity compensation expenses	—		—		—		—		948				—		948		—		948
Currency translation adjustment-net of tax	—		—		—		—		—		—		(406)		(406)		(281)		(687)
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		(608)				—		(608)				(608)
Balance at June 30, 2019	47,116,817	$	471		22,308,446	$	223	$	489,566	$	(2,736)	$	(2,000)	$	485,524	$	330,331	$	815,855

Balance at April 1, 2020	47,807,029	$	478		21,759,379	$	218	$	520,281	$	6,934	$	(8,746)	$	519,165	$	307,881	$	827,046
Net income	—		—		—		—		—		2,409		—		2,409		919		3,328
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	263,276		3		(263,276)		(3)		7,330		—		—		7,330		—		7,330
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	19,071		—		—		—		531		—		—		531		—		531
Forfeiture of unvested Class A common stock	(834)		—		—		—		(27)		—		—		(27)		—		(27)
Exercise of stock options	3,165		—		—		—		90		—		—		90		—		90
Change in non-controlling interest allocation	—		—		—		—		(26,215)		—		—		(26,215)		17,513		(8,702)
Non-cash equity compensation expenses	—		—		—		—		1,173		—		—		1,173		—		1,173
Currency translation adjustment-net of tax	—		—		—		—		—		—		3,714		3,714		2,064		5,778
Unrealized loss on interest rate swaps designated as a cash flow hedges-net of tax	—		—		—		—		—		—		(3,484)		(3,484)		(1,899)		(5,383)
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		46		—		—		46		—		46
Balance at June 30, 2020	48,091,707	$	481		21,496,103	$	215	$	503,209	$	9,343	$	(8,516)	$	504,732	$	326,478	$	831,210

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in shareholders’ equity

Six months ended June 30, 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	—		—		—		—		—		(2,146)		—		(2,146)		2,420		274
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	514,826		6		(514,826)		(5)		16,571		—		—		16,572		—		16,572
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	312,871		3		—		—		9,972		—		—		9,975		—		9,975
Forfeiture of unvested Class A common stock	(909)		—		—		—		(30)		—		—		(30)		—		(30)
Exercise of stock options	24,126		—		—		—		796		—		—		796		—		796
Change in non-controlling interest allocation	—		—		—		—		(11,032)		—		—		(11,032)		(14,790)		(25,822)
Non-cash equity compensation expenses	—		—		—		—		1,653		—		—		1,653		—		1,653
Currency translation adjustment-net of tax	—		—		—		—		—		—		(176)		(176)		(157)		(333)
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		250		—		—		250		—		250
Balance at June 30, 2019	47,116,817	$	471		22,308,446	$	223	$	489,566	$	(2,736)	$	(2,000)	$	485,524	$	330,331	$	815,855

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	—		—		—		—		—		22,805		—		22,805		14,542		37,347
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	579,646		6		(579,646)		(6)		13,366		—		—		13,366		—		13,366
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	85,702		1		—		—		1,802		—		—		1,803		—		1,803
Forfeiture of unvested Class A common stock	(834)		—		—		—		(27)		—		—		(27)		—		(27)
Exercise of stock options	5,878		—		—		—		167		—		—		167		—		167
Change in non-controlling interest allocation	—		—		—		—		(12,128)		—		—		(12,128)		(4,017)		(16,145)
Non-cash equity compensation expenses	—