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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 September 30, 2020

OR

    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)

(646519-2456

(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 November 2, 2020, the registrant had 50,610,589 shares of Class A common stock and 20,895,381 shares of Class B common stock outstanding.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 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

46

Item 4.

Controls and Procedures

47

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 6.

Exhibits

49

SIGNATURES

50

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, 

    

September 30, 

2019

2020

ASSETS

 

  

 

  

Cash and cash equivalents

$

65,178

$

42,655

Accounts receivable less allowances of $684 at 2019 and $1,375 at 2020

 

129,337

 

157,071

Prepaid expenses and other assets

 

58,581

 

62,987

Fixed assets—net

 

41,634

 

45,322

Operating lease assets

180,114

236,822

Debt financing costs—net

 

9,645

 

7,623

Deferred tax assets—net

75,453

103,456

Goodwill

 

1,090,231

 

1,125,604

Other intangible assets—net

 

1,003,456

 

947,727

TOTAL ASSETS

$

2,653,629

$

2,729,267

LIABILITIES AND EQUITY

 

  

LIABILITIES

 

  

Accounts payable

$

8,077

$

8,563

Accrued expenses

 

41,442

 

61,580

Due to affiliates

 

58,600

 

46,753

Deferred revenue

 

7,839

 

10,958

Other liabilities

 

215,878

 

167,725

Operating lease liabilities

196,425

256,903

Borrowings under credit facilities (stated value of $1,279,188 and $1,260,514 at December 31, 2019 and September 30, 2020, respectively)

 

1,272,999

 

1,259,975

Tax receivable agreements obligations

48,399

78,124

TOTAL LIABILITIES

 

1,849,659

 

1,890,581

COMMITMENTS AND CONTINGENCIES (Note 12)

 

  

EQUITY

Class A common stock, par value $0.01, 500,000,000 shares authorized; 47,421,315 and 50,594,372 shares issued and outstanding at December 31, 2019 and September 30, 2020, respectively

474

506

Class B common stock, par value $0.01, 500,000,000 shares authorized; 22,075,749 and 20,895,381 shares issued and outstanding at December 31, 2019 and September 30, 2020, respectively

221

209

Additional paid-in capital

498,186

536,619

Retained earnings (deficit)

(13,462)

10,985

Accumulated other comprehensive loss

(1,299)

(7,311)

Total shareholders' equity

484,120

541,008

Non-controlling interest

319,850

297,678

Total equity

803,970

838,686

TOTAL LIABILITIES AND EQUITY

$

2,653,629

$

2,729,267

See notes to unaudited condensed consolidated financial statements

2

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 nine months ended

September 30, 

September 30, 

    

2019

    

2020

    

2019

    

2020

REVENUES:

  

  

  

  

Wealth management fees

$

299,348

$

311,805

$

825,728

$

925,527

Other

 

17,293

 

19,678

 

52,382

 

56,119

 

Total revenues

 

316,641

 

331,483

 

878,110

 

981,646

 

OPERATING EXPENSES:

 

 

 

 

 

Compensation and related expenses

 

111,829

 

114,702

 

318,808

 

346,460

 

Management fees

 

81,112

 

86,414

 

217,370

 

247,094

 

Selling, general and administrative

 

58,665

 

57,437

 

170,658

 

172,784

 

Management contract buyout

1,428

Intangible amortization

 

34,898

 

37,024

 

94,860

 

108,759

 

Non-cash changes in fair value of estimated contingent consideration

 

14,435

 

14,280

 

25,696

 

(621)

 

Depreciation and other amortization

 

2,797

 

3,120

 

7,535

 

9,131

 

Total operating expenses

 

303,736

 

312,977

 

836,355

 

883,607

 

INCOME FROM OPERATIONS

 

12,905

 

18,506

 

41,755

 

98,039

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

Interest income

 

291

 

61

 

827

 

412

 

Interest expense

 

(15,852)

 

(8,903)

 

(43,135)

 

(32,546)

 

Amortization of debt financing costs

 

(919)

 

(709)

 

(2,483)

 

(2,200)

 

Loss on extinguishment of borrowings

 

 

 

 

(6,094)

 

Other income (expense)—net

 

9

 

(657)

 

(695)

 

25

 

Income from equity method investments

53

51

696

167

Total other expense—net

 

(16,418)

 

(10,157)

 

(44,790)

 

(40,236)

 

INCOME (LOSS) BEFORE INCOME TAX

 

(3,513)

8,349

 

(3,035)

 

57,803

 

INCOME TAX EXPENSE (BENEFIT)

 

(3,905)

4,405

 

(3,701)

 

16,512

 

NET INCOME

392

3,944

666

41,291

Non-controlling interest

881

(2,302)

(1,539)

(16,844)

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

1,273

$

1,642

$

(873)

$

24,447

Income (loss) per share of Class A common stock:

Basic

$

0.03

$

0.03

$

(0.02)

$

0.51

Diluted

$

0.03

$

0.03

$

(0.02)

$

0.51

Weighted average shares of Class A common stock outstanding:

Basic

47,044,507

48,683,580

46,653,820

47,991,831

Diluted

47,058,613

48,810,328

46,653,820

48,040,014

See notes to unaudited condensed consolidated financial statements

3

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of comprehensive income (loss)

(In thousands)

For the three months ended

For the nine months ended

 

September 30, 

September 30, 

    

2019

    

2020

    

2019

    

2020

 

Net income

$

392

$

3,944

$

666

$

41,291

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

(2,464)

 

3,103

 

(2,797)

 

316

Unrealized loss on interest rate swap designated as a cash flow hedge

(981)

(9,308)

Comprehensive income (loss)

(2,072)

6,066

(2,131)

32,299

Less: Comprehensive (income) loss attributable to noncontrolling interest

1,769

(3,219)

(494)

(13,864)

Comprehensive income (loss) attributable to common shareholders

$

(303)

$

2,847

$

(2,625)

$

18,435

See notes to unaudited condensed consolidated financial statements

4

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)

For the nine months ended

September 30, 

    

2019

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

666

$

41,291

Adjustments to reconcile net income to net cash provided by operating activities—net of effect of acquisitions:

 

 

  

Intangible amortization

 

94,860

 

108,759

Depreciation and other amortization

 

7,535

 

9,131

Amortization of debt financing costs

 

2,483

 

2,200

Non-cash equity compensation expense

 

13,375

 

15,588

Non-cash changes in fair value of estimated contingent consideration

 

25,696

 

(621)

Income from equity method investments

 

(696)

 

(167)

Distributions received from equity method investments

 

668

 

145

Deferred taxes and other non-cash items

 

117

 

4,148

Loss on extinguishment of borrowings

 

 

6,094

Changes in cash resulting from changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

(30,367)

 

(25,716)

Prepaid expenses and other assets

 

(4,820)

 

(4,168)

Accounts payable

 

1,240

 

110

Accrued expenses

 

39,968

 

20,294

Due to affiliates

 

365

 

(11,749)

Other liabilities

 

(21,964)

 

(28,761)

Deferred revenue

 

794

 

1,889

Net cash provided by operating activities

 

129,920

 

138,467

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Cash paid for acquisitions and contingent consideration—net of cash acquired

 

(494,336)

 

(69,467)

Purchase of fixed assets

 

(20,758)

 

(12,691)

Net cash used in investing activities

 

(515,094)

 

(82,158)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Borrowings under credit facilities

 

939,125

 

305,000

Repayments of borrowings under credit facilities

 

(496,906)

 

(323,674)

Contingent consideration paid

 

(20,514)

 

(45,069)

Payments of debt financing costs

 

(3,743)

 

(634)

Proceeds from exercise of stock options

796

1,559

Payments on finance lease obligations

(138)

(109)

Distributions for unitholders

 

(15,225)

 

(15,765)

Net cash provided by (used in) financing activities

 

403,395

 

(78,692)

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

(171)

 

(140)

CHANGE IN CASH AND CASH EQUIVALENTS

 

18,050

 

(22,523)

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

33,213

 

65,178

End of period

$

51,263

$

42,655

See Note 13 for supplemental cash flow disclosure

See notes to unaudited condensed consolidated financial statements

5

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in shareholders’ equity

Three months ended September 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 July 1, 2019

47,116,817

$

471

22,308,446

$

223

$

489,566

$

(2,736)

$

(2,000)

$

485,524

$

330,331

$

815,855

Net income

1,273

1,273

(881)

392

Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights

109,781

1

(109,781)

(1)

2,252

2,252

2,252

Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights

40,900

838

838

838

Forfeiture of unvested Class A common stock

(11,591)

(382)

(382)

(382)

Change in non-controlling interest allocation

9,263

9,263

(12,984)

(3,721)

Non-cash equity compensation expenses

903

903

903

Currency translation adjustment-net of tax

(1,576)

(1,576)

(888)

(2,464)

Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions

(99)

(99)

(99)

Balance at September 30, 2019

47,255,907

$

472

22,198,665

$

222

$

502,341

$

(1,463)

$

(3,576)

$

497,996

$

315,578

$

813,574

Balance at July 1, 2020

48,091,707

$

481

21,496,103

$

215

$

503,209

$

9,343

$

(8,516)

$

504,732

$

326,478

$

831,210

Net income

1,642

1,642

2,302

3,944

Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights

600,722

6

(600,722)

(6)

20,370

20,370

20,370

Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights

1,858,136

19

62,991

63,010

63,010

Forfeiture of unvested Class A common stock

Exercise of stock options

43,807

1,392

1,392

1,392

Change in non-controlling interest allocation

(53,865)

(53,865)

(32,019)

(85,884)

Non-cash equity compensation expenses

1,207

1,207

1,207

Currency translation adjustment-net of tax

1,823

1,823

1,280

3,103

Unrealized loss on interest rate swaps designated as a cash flow hedges-net of tax

(618)

(618)

(363)

(981)

Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions

1,315

1,315

1,315

Balance at September 30, 2020

50,594,372

$

506

20,895,381

$

209

$

536,619

$

10,985

$

(7,311)

$

541,008

$

297,678

$

838,686

See notes to unaudited condensed consolidated financial statements

6

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in shareholders’ equity

Nine months ended September 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

(873)

(873)

1,539

666

Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights

624,607

7

(624,607)

(6)

18,823

18,824

18,824

Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights

353,771

3

10,810

10,813

10,813

Forfeiture of unvested Class A common stock

(12,500)

(412)

(412)

(412)

Exercise of stock options

24,126

796

796

796

Change in non-controlling interest allocation

(1,769)

(1,769)

(27,774)

(29,543)

Non-cash equity compensation expenses

2,556

2,556

2,556

Currency translation adjustment-net of tax

(1,752)

(1,752)

(1,045)

(2,797)

Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions

151

151

151

Balance at September 30, 2019

47,255,907

$

472

22,198,665

$

222

$

502,341

$

(1,463)

$

(3,576)

$

497,996

$

315,578

$

813,574

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

24,447

24,447

16,844

41,291

Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights

1,180,368

12

(1,180,368)

(12)

33,736

33,736

33,736

Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights

1,943,838

20

64,793

64,813

64,813

Forfeiture of unvested Class A common stock

(834)

(27)

(27)

(27)

Exercise of stock options

49,685

1,559

1,559

1,559

Change in non-controlling interest allocation

(65,993)

(65,993)

(36,036)