0001558370-20-012709 | 10-Q | XBRL Viewer | Focus Financial Partners INC

Document and Entity Information - shares	9 Months Ended
Document and Entity Information - shares	Sep. 30, 2020	Nov. 02, 2020
Document and Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Transition Report	false
Document Period End Date	Sep. 30, 2020
Entity File Number	001-38604
Entity Registrant Name	Focus Financial Partners Inc.
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	47-4780811
Entity Address, Address Line One	875 Third Avenue, 28th Floor
Entity Address, City or Town	New York
Entity Address, State or Province	NY
Entity Address, Postal Zip Code	10022
City Area Code	646
Local Phone Number	519-2456
Title of 12(b) Security	Class A common stock, par value$0.01 per share
Trading Symbol	FOCS
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q3
Entity Central Index Key	0001651052
Amendment Flag	false
Class A common stock
Document and Entity Information
Entity Common Stock, Shares Outstanding		50,610,589
Class B common stock
Document and Entity Information
Entity Common Stock, Shares Outstanding		20,895,381

Unaudited Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
ASSETS
Cash and cash equivalents	$ 42,655	$ 65,178
Accounts receivable less allowances of $684 at 2019 and $1,375 at 2020	157,071	129,337
Prepaid expenses and other assets	62,987	58,581
Fixed assets-net	45,322	41,634
Operating lease assets	236,822	180,114
Debt financing costs-net	7,623	9,645
Deferred tax assets-net	103,456	75,453
Goodwill	1,125,604	1,090,231
Other intangible assets-net	947,727	1,003,456
TOTAL ASSETS	2,729,267	2,653,629
LIABILITIES
Accounts payable	8,563	8,077
Accrued expenses	61,580	41,442
Due to affiliates	46,753	58,600
Deferred revenue	10,958	7,839
Other liabilities	167,725	215,878
Operating lease liabilities	256,903	196,425
Borrowings under credit facilities (stated value of $1,279,188 and $1,260,514 at December 31, 2019 and September 30, 2020, respectively)	1,259,975	1,272,999
Tax receivable agreements obligations	78,124	48,399
TOTAL LIABILITIES	1,890,581	1,849,659
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY
Additional paid-in capital	536,619	498,186
Retained earnings (deficit)	10,985	(13,462)
Accumulated other comprehensive loss	(7,311)	(1,299)
Total shareholders' equity	541,008	484,120
Non-controlling interest	297,678	319,850
Total equity	838,686	803,970
TOTAL LIABILITIES AND EQUITY	2,729,267	2,653,629
Class A common stock
EQUITY
Common stock	506	474
Class B common stock
EQUITY
Common stock	$ 209	$ 221

Unaudited Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2020	Dec. 31, 2019
Accounts receivable, allowances	$ 1,375	$ 684
Borrowings under credit facilities, stated value	$ 1,260,514	$ 1,279,188
Class A common stock
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized shares	500,000,000	500,000,000
Common stock, issued shares	50,594,372	47,421,315
Common stock, outstanding shares	50,594,372	47,421,315
Class B common stock
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized shares	500,000,000	500,000,000
Common stock, issued shares	20,895,381	22,075,749
Common stock, outstanding shares	20,895,381	22,075,749

Unaudited Condensed Consolidated Statements of Operations - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
REVENUES:
Total revenues	$ 331,483	$ 316,641	$ 981,646	$ 878,110
OPERATING EXPENSES:
Compensation and related expenses	114,702	111,829	346,460	318,808
Management fees	86,414	81,112	247,094	217,370
Selling, general and administrative	57,437	58,665	172,784	170,658
Management contract buyout				1,428
Intangible amortization	37,024	34,898	108,759	94,860
Non-cash changes in fair value of estimated contingent consideration	14,280	14,435	(621)	25,696
Depreciation and other amortization	3,120	2,797	9,131	7,535
Total operating expenses	312,977	303,736	883,607	836,355
INCOME FROM OPERATIONS	18,506	12,905	98,039	41,755
OTHER INCOME (EXPENSE):
Interest income	61	291	412	827
Interest expense	(8,903)	(15,852)	(32,546)	(43,135)
Amortization of debt financing costs	(709)	(919)	(2,200)	(2,483)
Loss on extinguishment of borrowings			(6,094)
Other income (expense)-net	(657)	9	25	(695)
Income from equity method investments	51	53	167	696
Total other expense-net	(10,157)	(16,418)	(40,236)	(44,790)
Other income (expense)-net	8,349	(3,513)	57,803	(3,035)
INCOME TAX EXPENSE (BENEFIT)	4,405	(3,905)	16,512	(3,701)
NET INCOME	3,944	392	41,291	666
Non-controlling interest	(2,302)	881	(16,844)	(1,539)
NET INCOME (LOSS ) ATTRIBUTABLE TO COMMON SHAREHOLDERS	1,642	1,273	24,447	(873)
Wealth management fees
REVENUES:
Total revenues	311,805	299,348	925,527	825,728
Other
REVENUES:
Total revenues	$ 19,678	$ 17,293	$ 56,119	$ 52,382
Class A common stock
Income (loss) per share of Class A common stock:
Basic income (loss) per share	$ 0.03	$ 0.03	$ 0.51	$ (0.02)
Diluted income (loss) per share	$ 0.03	$ 0.03	$ 0.51	$ (0.02)
Weighted average shares of Class A common stock outstanding:
Weighted average shares of Class A common stock outstanding	48,683,580	47,044,507	47,991,831	46,653,820
Weighted average shares of Class A common stock outstanding	48,810,328	47,058,613	48,040,014	46,653,820

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019	Sep. 30, 2020	Sep. 30, 2019
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
Net income (loss)	$ 3,944	$ 392	$ 41,291	$ 666
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	3,103	(2,464)	316	(2,797)
Unrealized loss on interest rate swap designated as a cash flow hedge	(981)		(9,308)
Comprehensive income (loss)	6,066	(2,072)	32,299	(2,131)
Less: Comprehensive (income) loss attributable to noncontrolling interest	(3,219)	1,769	(13,864)	(494)
Comprehensive income (loss) attributable to common shareholders	$ 2,847	$ (303)	$ 18,435	$ (2,625)

- Definition

Amount after tax of increase (decrease) in equity from transactions and other events and circumstances from net income (loss) and other comprehensive income (loss), attributable to noncontrolling interests. Excludes changes in equity resulting from investments by owners and distributions to owners.

+ References + Details

- Definition

Amount after tax of increase (decrease) in equity from transactions and other events and circumstances from net income and other comprehensive income. Excludes changes in equity resulting from investments by owners and distributions to owners.

+ References + Details

- Definition

The consolidated profit or loss for the period, net of income taxes, including the portion attributable to the noncontrolling interest.

+ References

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+ Details

Unaudited Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 41,291	$ 666
Adjustments to reconcile net income to net cash provided by operating activities-net of effect of acquisitions:
Intangible amortization	108,759	94,860
Depreciation and other amortization	9,131	7,535
Amortization of debt financing costs	2,200	2,483
Non-cash equity compensation expense	15,588	13,375
Non-cash changes in fair value of estimated contingent consideration	(621)	25,696
Income from equity method investments	(167)	(696)
Distributions received from equity method investments	145	668
Deferred taxes and other non-cash items	4,148	117
Loss on extinguishment of borrowings	6,094
Changes in cash resulting from changes in operating assets and liabilities:
Accounts receivable	(25,716)	(30,367)
Prepaid expenses and other assets	(4,168)	(4,820)
Accounts payable	110	1,240
Accrued expenses	20,294	39,968
Due to affiliates	(11,749)	365
Other liabilities	(28,761)	(21,964)
Deferred revenue	1,889	794
Net cash provided by operating activities	138,467	129,920
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions and contingent consideration-net of cash acquired	(69,467)	(494,336)
Purchase of fixed assets	(12,691)	(20,758)
Net cash used in investing activities	(82,158)	(515,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities	305,000	939,125
Repayments of borrowings under credit facilities	(323,674)	(496,906)
Contingent consideration paid	(45,069)	(20,514)
Payments of debt financing costs	(634)	(3,743)
Proceeds from exercise of stock options	1,559	796
Payments on finance lease obligations	(109)	(138)
Distributions for unitholders	(15,765)	(15,225)
Net cash provided by (used ins) financing activities	(78,692)	403,395
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	(140)	(171)
CHANGE IN CASH AND CASH EQUIVALENTS	(22,523)	18,050
CASH AND CASH EQUIVALENTS:
Beginning of period	65,178	33,213
End of period	$ 42,655	$ 51,263

Unaudited Condensed Consolidated Statements of Changes in Members' Deficit/Shareholders' Equity - USD ($) $ in Thousands	Total Shareholders' Equity	Common Stock Class A common stock	Common Stock Class B common stock	Additional Paid-In Capital	Retained Earnings (Deficit)	Accumulated Other Comprehensive Loss	Non-controlling Interest	Total
Beginning balance at Dec. 31, 2018	$ 469,662	$ 462	$ 228	$ 471,386	$ (590)	$ (1,824)	$ 342,858	$ 812,520
Beginning balance (in shares) at Dec. 31, 2018		46,265,903	22,823,272
Increase (Decrease) in shareholders' equity
Net income (loss)	(873)				(873)		1,539	666
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights (in shares)		624,607	(624,607)
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	10,813	$ 3		10,810				10,813
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights (in shares)		353,771
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	18,824	$ 7	$ (6)	18,823				18,824
Forfeiture of unvested Class A common stock	(412)			(412)				(412)
Forfeiture of unvested Class A common stock (in shares)		(12,500)
Exercise of stock options	796			796				796
Exercise of stock options (in shares)		24,126
Change in non-controlling interest allocation	(1,769)			(1,769)			(27,774)	(29,543)
Non-cash equity compensation expense	2,556			2,556				2,556
Currency translation adjustment - net of tax	(1,752)					(1,752)	(1,045)	(2,797)
Adjustment of deferred tax assets, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	151			151				151
Ending balance at Sep. 30, 2019	497,996	$ 472	$ 222	502,341	(1,463)	(3,576)	315,578	813,574
Ending Balance (in shares) at Sep. 30, 2019		47,255,907	22,198,665
Beginning balance at Jun. 30, 2019	485,524	$ 471	$ 223	489,566	(2,736)	(2,000)	330,331	815,855
Beginning balance (in shares) at Jun. 30, 2019		47,116,817	22,308,446
Increase (Decrease) in shareholders' equity
Net income (loss)	1,273				1,273		(881)	392
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	2,252	$ 1	$ (1)	2,252				2,252
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights (in shares)		109,781	(109,781)
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	838			838				838
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights (in shares)		40,900
Forfeiture of unvested Class A common stock	(382)			(382)				(382)
Forfeiture of unvested Class A common stock (in shares)		(11,591)
Change in non-controlling interest allocation	9,263			9,263			(12,984)	(3,721)
Non-cash equity compensation expense	903			903				903
Currency translation adjustment - net of tax	(1,576)					(1,576)	(888)	(2,464)
Adjustment of deferred tax assets, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	(99)			(99)				(99)
Ending balance at Sep. 30, 2019	497,996	$ 472	$ 222	502,341	(1,463)	(3,576)	315,578	813,574
Ending Balance (in shares) at Sep. 30, 2019		47,255,907	22,198,665
Beginning balance at Dec. 31, 2019	484,120	$ 474	$ 221	498,186	(13,462)	(1,299)	319,850	803,970
Beginning balance (in shares) at Dec. 31, 2019		47,421,315	22,075,749
Increase (Decrease) in shareholders' equity
Net income (loss)	24,447				24,447		16,844	41,291
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	33,736	$ 12	$ (12)	33,736				33,736
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights (in shares)		1,180,368	(1,180,368)
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	64,813	$ 20		64,793				64,813
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights (in shares)		1,943,838
Forfeiture of unvested Class A common stock	(27)			(27)				(27)
Forfeiture of unvested Class A common stock (in shares)		(834)
Exercise of stock options	1,559			1,559				1,559
Exercise of stock options (in shares)		49,685
Change in non-controlling interest allocation	(65,993)			(65,993)			(36,036)	(102,029)
Non-cash equity compensation expense	3,397			3,397				3,397
Currency translation adjustment - net of tax	13					13	303	316
Unrealized loss on interest rate swap designated as a cash flow hedge	(6,025)					(6,025)	(3,283)	(9,308)
Adjustment of deferred tax assets, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	968			968				968
Ending balance at Sep. 30, 2020	541,008	$ 506	$ 209	536,619	10,985	(7,311)	297,678	838,686
Ending Balance (in shares) at Sep. 30, 2020		50,594,372	20,895,381
Beginning balance at Jun. 30, 2020	504,732	$ 481	$ 215	503,209	9,343	(8,516)	326,478	831,210
Beginning balance (in shares) at Jun. 30, 2020		48,091,707	21,496,103
Increase (Decrease) in shareholders' equity
Net income (loss)	1,642				1,642		2,302	3,944
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	20,370	$ 6	$ (6)	20,370				20,370
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights (in shares)		600,722	(600,722)
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	63,010	$ 19		62,991				63,010
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights (in shares)		1,858,136
Exercise of stock options	1,392			1,392				1,392
Exercise of stock options (in shares)		43,807
Change in non-controlling interest allocation	(53,865)			(53,865)			(32,019)	(85,884)
Non-cash equity compensation expense	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 swap designated as a cash flow hedge	(618)					(618)	(363)	(981)
Adjustment of deferred tax assets, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	1,315			1,315				1,315
Ending balance at Sep. 30, 2020	$ 541,008	$ 506	$ 209	$ 536,619	$ 10,985	$ (7,311)	$ 297,678	$ 838,686
Ending Balance (in shares) at Sep. 30, 2020		50,594,372	20,895,381

GENERAL

9 Months Ended

Sep. 30, 2020

GENERAL

GENERAL

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.

SUMMARY OF ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2020

SUMMARY OF ACCOUNTING POLICIES

SUMMARY OF ACCOUNTING POLICIES

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 and nine months ended September 30, 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 geographic region. The following table disaggregates the revenues based on the location of the partner firm legal entities that generate the revenues and therefore may not be reflective of the geography in which clients are located.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2020		2019		2020
Domestic revenue	$	302,572	$	313,956	$	844,784	$	933,420
International revenue		14,069		17,527		33,326		48,226
Total revenue	$	316,641	$	331,483	$	878,110	$	981,646

International revenue consists of revenue generated by partner firm legal entities in Australia, Canada and the United Kingdom.

Derivatives

The Company uses 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 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.

NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE

9 Months Ended

Sep. 30, 2020

NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE

NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE

3. NON-CONTROLLING INTEREST AND INCOME (LOSS) PER SHARE

The calculation of controlling and non-controlling interest is as follows as of September 30, 2019 and 2020:


	2019		2020
Focus LLC common units held by continuing owners	22,198,665		20,895,381
Common unit equivalents of outstanding vested and unvested incentive units held by continuing owners (1)	4,006,594		4,860,295
Total common units and common unit equivalents attributable to non-controlling interest	26,205,259		25,755,676
Total common units and common unit equivalents of incentive units outstanding	73,461,166		76,350,048
Non-controlling interest allocation	35.7	%	33.7	%
Company’s interest in Focus LLC	64.3	%	66.3	%

(1)

Focus LLC common units issuable upon conversion of 17,748,891 and 16,658,578 (see Note 9) vested and unvested Focus LLC incentive units outstanding as of September 30, 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 to net income (loss) attributable to common shareholders:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2020		2019		2020
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

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				Nine Months Ended
	September 30,				September 30,
	2019		2020		2019		2020
Basic income (loss) per share:
Net income (loss) attributable to common shareholders	$	1,273	$	1,642	$	(873)	$	24,447
Weighted average shares of Class A common stock outstanding		47,044,507		48,683,580		46,653,820		47,991,831
Basic income (loss) per share	$	0.03	$	0.03	$	(0.02)	$	0.51

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 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, restricted stock units and Focus LLC common and incentive units as calculated using the treasury stock method:



	Three Months Ended				Nine Months Ended
		September 30,				September 30,
	2019		2020		2019		2020
Diluted income (loss) per share:
Net income (loss) attributable to common shareholders	$	1,273	$	1,642	$	(873)	$	24,447
Add: Dilutive effect of non-controlling interests related to Focus LLC common and incentive units		—		—		—		—
Total		1,273		1,642		(873)		24,447

Weighted average shares of Class A common stock outstanding		47,044,507		48,683,580		46,653,820		47,991,831
Effect of dilutive stock options		—		60,974		—		21,728
Effect of dilutive unvested Class A common stock and restricted stock units		14,106		65,774		—		26,455
Effect of dilutive non-controlling interests related to Focus LLC common and incentive units		—		—		—		—
Total		47,058,613		48,810,328		46,653,820		48,040,014
Diluted income (loss) per share	$	0.03	$	0.03	$	(0.02)	$	0.51

Diluted loss per share for the nine months ended September 30, 2019 excludes incremental shares of 15,773 related to unvested Class A common stock since the effect would be antidilutive. Diluted income (loss) per share for the three and nine months ended September 30, 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 September 30, 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). In computing the dilutive effect, if any, that the exchange would have on net income (loss) per share, net income (loss) attributable to Class A common shareholders would be adjusted due to the elimination of the non-controlling interests (including any associated tax impact). For the three and nine months ended September 30, 2019 and 2020, such exchange is not reflected in diluted net income (loss) per share as the assumed exchange is not dilutive.

ACQUISITIONS

9 Months Ended

Sep. 30, 2020

ACQUISITIONS

ACQUISITIONS

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 reporting date until the contingency is resolved. The purchase price associated with business acquisitions and the allocation thereof during the nine months ended September 30, 2020 is as follows:


Number of business acquisitions closed		7
Consideration:
Cash due at closing	$	68,726
Working capital adjustments		(174)
Fair market value of estimated contingent consideration		8,963
Total consideration	$	77,515
Allocation of purchase price:
Total tangible assets	$	8,001
Total liabilities assumed		(15,600)
Customer relationships		48,450
Management contracts		1,564
Goodwill		34,897
Other acquired intangibles		203
Total allocated consideration	$	77,515

Management believes approximately $47,931 of tax goodwill and intangibles related to business acquisitions completed during the nine months ended September 30, 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 the nine months ended September 30, 2020 includes revenue and income from operations for the two business acquisitions that are new subsidiary partner firms from the dates they were acquired of $6,996 and $1,053, 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 three asset acquisitions during the nine months ended September 30, 2020. Total purchase consideration for asset acquisitions during the nine months ended September 30, 2020 was $750 in cash plus 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 nine months ended September 30, 2020 through business acquisitions and asset acquisitions are as follows:



		Number of years
Management contracts		16
Customer relationships		8
Other acquired intangibles		5
Weighted-average useful life of all intangibles acquired		9

From October 1, 2020 to November 5, 2020, the Company completed 4 business acquisition for cash of $51,447, plus contingent consideration.

GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2020

GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL AND OTHER INTANGIBLE ASSETS

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 nine months ended September 30, 2020:


	December 31,		September 30,
	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		34,897
Other		(63)		476
		229,736		35,373
Balance end of period:
Goodwill		1,112,855		1,148,228
Cumulative impairment losses		(22,624)		(22,624)
	$	1,090,231	$	1,125,604

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 September 30, 2020:


	Gross Carry		Accumulated		Net Book
	Amount		Amortization		Value
Customer relationships	$	1,413,086		(573,433)		839,653
Management contracts		152,006		(45,785)		106,221
Other acquired intangibles		5,488		(3,635)		1,853
Total	$	1,570,580	$	(622,853)	$	947,727

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2020

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

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.

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 September 30, 2020 are as follows:


	December 31, 2019				September 30, 2020
	Stated		Fair		Stated		Fair
	Value		Value		Value		Value
First Lien Term Loan	$	1,139,188	$	1,146,307	$	1,130,514	$	1,095,185

Derivatives

At September 30, 2020, the fair value of the Company’s $850,000 notional amount interest rate swap agreements was $(11,337). 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 nine months ended September 30, 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		8,963
Payments of contingent consideration		(73,588)
Non-cash changes in fair value of estimated contingent consideration		(621)
Other		(219)
Balance at September 30, 2020	$	118,103

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

During the year ended December 31, 2019, the Company paid $36,862 in cash as contingent consideration associated with business acquisitions. During the nine months ended September 30, 2020, the Company paid $73,588 in cash as contingent consideration associated with business acquisitions. In addition, the Company also paid $2,537 and $1,961 of contingent consideration for the nine months ended September 30, 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 September 30, 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	11.0% - 17.0	%


		Quantitative Information About Level 3
		Fair Value Measurements
Fair Value at		Valuation	Unobservable
September 30, 2020		Techniques	Inputs	Ranges
$	118,103	Monte Carlo Simulation Model	Forecasted growth rates	(29.5)% - 57.5	%
			Discount rates	6.4% - 18.0	%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

CREDIT FACILITY

9 Months Ended

Sep. 30, 2020

CREDIT FACILITY

CREDIT FACILITY

7. CREDIT FACILITY

As of September 30, 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 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 September 30, 2020, Focus LLC's First Lien Leverage Ratio was 3.67:1.00, 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 $332,317 at September 30, 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 September 30, 2020:


	December 31,		September 30,
	2019		2020
First Lien Term Loan	$	1,139,188	$	1,130,514
First Lien Revolver		140,000		130,000
Unamortized debt financing costs		(5,389)		(539)
Unamortized discount		(800)		—
Total	$	1,272,999	$	1,259,975

At December 31, 2019 and September 30, 2020, unamortized debt financing costs associated with the First Lien Revolver of $9,645 and $7,623, 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 3% for the nine months ended September 30, 2020.

As of December 31, 2019 and September 30, 2020, the First Lien Revolver available unused commitment line was $502,962 and $512,266, respectively.

As of December 31, 2019 and September 30, 2020, Focus LLC was contingently obligated for letters of credit in the amount of $7,038 and $7,734, respectively, each bearing interest at an annual rate of approximately 2%.

DERIVATIVES

9 Months Ended

Sep. 30, 2020

DERIVATIVES

DERIVATIVES

8. DERIVATIVES

In March 2020, the Company entered into a 4 year floating to fixed interest rate swap with a notional amount of $400,000. The interest rate swap effectively fixes the variable interest rate applicable to $400,000 of borrowings outstanding on the First Lien Term Loan. The terms of the interest rate swap provide that the Company pays interest to the counterparty each month at a rate of 0.713% and receive interest from the counterparty each month at the 1 month USD LIBOR rate, subject to a 0% floor. In April 2020, the Company entered into two additional 4 year floating to fixed interest rate swap agreements with notional amounts of $250,000 and $200,000, respectively. These swaps effectively fix the variable interest rate applicable to $450,000 of borrowings outstanding on the First Lien Term Loan. The terms of these swaps provide that the Company pays interest to the counterparties each month at a rate of 0.537% and 0.5315%, respectively, and receive interest from the counterparties each month at the 1 month USD LIBOR rate, subject to a 0%

floor. The Company designated these swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on these portions of its First Lien Term Loan borrowings.

At September 30, 2020, the fair value of the interest rate swaps was $(11,337), which is included in other liabilities in the accompanying unaudited condensed consolidated balance sheet. The interest rate swaps continue to be effective hedges, and as such, the offsetting adjustment to the fair value is recorded in accumulated other comprehensive loss, net of tax of $2,029.

EQUITY

9 Months Ended

Sep. 30, 2020

EQUITY

EQUITY

9. EQUITY

Exchange rights

Each Focus LLC common unit, together with a corresponding share of the Company’s Class B common stock, and Focus LLC incentive unit (after conversion into a number of Focus LLC common units taking into account the then-current value of the common units and such incentive unit’s aggregate hurdle amount) is exchangeable, pursuant to the terms and subject to the conditions set forth in the Operating Agreement, for one share of the Company’s Class A common stock, or, if either the Company or Focus LLC so elects, cash.

In March 2020, the Company issued an aggregate of 383,001 shares of Class A common stock and retired 316,370 shares of Class B common stock and 162,871 incentive units in Focus LLC and acquired 383,001 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.

In June 2020, the Company issued an aggregate of 282,347 shares of Class A common stock and retired 263,276 shares of Class B common stock and 35,000 incentive units in Focus LLC and acquired 282,347 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.

In September 2020, the Company issued an aggregate of 2,458,858 shares of Class A common stock and retired 600,722 shares of Class B common stock and 2,706,350 incentive units in Focus LLC and acquired 2,458,858 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.

Stock Options, Unvested Class A Common Stock and Restricted Stock Units

The following table provides information relating to the changes in the Company’s stock options during the nine months ended September 30, 2020:


	Stock	Weighted Average
	Options	Exercise Price
Outstanding—January 1, 2020	1,832,966	$	30.42
Granted	—		—
Exercised	(49,685)		31.40
Forfeited	(21,817)		29.27
Outstanding—September 30, 2020	1,761,464		30.40
Vested—September 30, 2020	669,441		32.06

The following table provides information relating to the changes in the Company’s unvested Class A common stock during the nine months ended September 30, 2020:


		Weighted
		Average
	Unvested Class A	Grant Date
	Common Stock	Fair Value
Outstanding—January 1, 2020	53,293	$	33.00
Forfeited	(834)		33.00
Vested	—		—
Outstanding—September 30, 2020	52,459		33.00

The following table provides information relating to the changes in the Company’s restricted stock units during the nine months ended September 30, 2020:


		Weighted
		Average
	Restricted Stock	Grant Date
	Units	Fair Value
Outstanding—January 1, 2020	98,061	$	27.90
Granted	—		—
Forfeited	(7,707)		27.90
Vested	—		—
Outstanding—September 30, 2020	90,354		27.90

The Company recognized $1,011 and $3,071 of non-cash equity compensation expense in relation to the stock options and unvested Class A common stock during the three and nine months ended September 30, 2019, respectively.

The Company recognized $1,380 and $3,910 of non-cash equity compensation expense in relation to the stock options, unvested Class A common stock and restricted stock units during the three and nine months ended September 30, 2020, respectively.

Focus LLC Incentive Units

The following table provides information relating to the changes in Focus LLC incentive units during the nine months ended September 30, 2020:


		Weighted Average
	Incentive Units	Hurdle Price
Outstanding—January 1, 2020	19,754,450	$	21.59
Granted	30,000		30.48
Exchanged	(2,904,221)		11.80
Forfeited	(221,651)		24.67
Outstanding—September 30, 2020	16,658,578		23.28
Vested—September 30, 2020	7,334,000		16.81

Incentive units outstanding and vested at September 30, 2020 were as follows:


	Number	Vested Incentive
Hurdle Rates	Outstanding	Units
$1.42	421	421
5.50	798	798
6.00	386	386
7.00	1,081	1,081
9.00	1,323,708	1,323,708
11.00	841,706	841,706
12.00	520,000	520,000
13.00	579,213	579,213
14.00	17,848	17,848
16.00	48,054	48,054
17.00	22,500	22,500
19.00	635,964	635,964
21.00	3,608,442	2,108,442
22.00	1,112,903	518,696
23.00	524,828	262,414
26.26	25,000	—
27.00	29,484	14,742
27.90	2,051,131	—
28.50	1,585,111	388,027
30.48	30,000	—
33.00	3,670,000	40,000
36.64	30,000	10,000
	16,658,578	7,334,000

The Company recorded $3,265 and $10,304 of non-cash equity compensation expense for incentive units during the three and nine months ended September 30, 2019, respectively.

The Company recorded $3,926 and $11,678 of non-cash equity compensation expense for incentive units during the three and nine months ended September 30, 2020, respectively.

INCOME TAXES

9 Months Ended

Sep. 30, 2020

INCOME TAXES

INCOME TAXES

10. INCOME TAXES

The estimated annual effective tax rate for the nine months ended September 30, 2020 was 25.8% as compared to (141.7)% for the year ended December 31, 2019. The increase in the estimated annual effective tax rate is primarily attributable to expected full year income before income taxes for the year ending December 31, 2020 as compared to the loss before income taxes for the year ended December 31, 2019. For the nine months ended September 30, 2020, we recorded a discrete income tax expense of $1,599 primarily related to newly issued regulations relating to the limitation on the deduction of business interest expense. Income tax expense for the nine months ended September 30, 2020 is primarily related to federal, state and local income taxes imposed on the Company’s allocable portion of taxable income from Focus LLC. The allocable portion of taxable income primarily differs from the net income (loss) attributable to the Company due to permanent differences such as non-deductible equity-based compensation expense of Focus LLC.

During the nine months ended September 30, 2020, there were no changes to the Company’s uncertain tax positions.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

+ References + Details

TAX RECEIVABLE AGREEMENTS

9 Months Ended

Sep. 30, 2020

TAX RECEIVABLE AGREEMENTS

TAX RECEIVABLE AGREEMENTS

11. TAX RECEIVABLE AGREEMENTS

In connection with the Reorganization Transactions and the closing of the IPO, the Company entered into two Tax Receivable Agreements (“TRAs”): one with certain entities affiliated with the Company’s private equity investors and the other with certain other continuing and former owners of Focus LLC. In March 2020 Focus Inc. entered into an additional Tax Receivable Agreement for TRA holders that join Focus LLC as members after the closing of the IPO (the parties to the three agreements, collectively, the “TRA holders”). New Focus LLC owners in the future may also become party to this additional Tax Receivable Agreement. The agreements generally provide for the payment by the Company to each TRA holder of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in connection with the Reorganization Transactions and in periods after the IPO or after entering into the Tax Receivable Agreement, as applicable, as a result of certain increases in tax bases and certain tax benefits attributable to imputed interest. The Company will retain the benefit of the remaining 15% of these cash savings.

As of September 30, 2020, the Company had recorded a liability of $78,124 relating to the TRA obligations. Future payments under the TRAs in respect of future exchanges of Focus LLC units for shares of Class A common stock will be in addition to the amount recorded.

COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2020

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

12. COMMITMENTS AND CONTINGENCIES

Credit Risk—The Company’s broker-dealer subsidiaries clear all transactions through clearing brokers on a fully disclosed basis. Pursuant to the terms of the agreements between the Company’s broker-dealer subsidiaries and their clearing brokers, the clearing brokers have the right to charge the Company’s broker-dealer subsidiaries for losses that result from a counterparty’s failure to fulfill its contractual obligations. This right applies to all trades executed through its clearing brokers, and therefore, the Company believes there is no maximum amount assignable to the right of the clearing brokers. Accordingly, at December 31, 2019 and September 30, 2020, the Company had recorded no liabilities in connection with this right.

In addition, the Company has the right to pursue collection or performance from the counterparties who do not perform under their contractual obligations. The Company monitors the credit standing of the clearing brokers and counterparties with which they conduct business.

The Company is exposed to credit risk for accounts receivable from clients. Such credit risk is limited to the amount of accounts receivable. The Company is also exposed to credit risk for changes in the benchmark interest rate (LIBOR or Base Rate) in connection with its Credit Facility.

The counterparties to the Company’s derivative financial instruments are major international financial institutions. The Company is exposed to credit risk for the net exchanges under these agreements, but not for the notional amounts. The Company does not anticipate non-performance by any of its counterparties.

The Company maintains its cash in bank depository accounts, which, at times, may exceed federally insured limits. The Company selects depository institutions based, in part, upon management’s review of the financial stability of the institution. At December 31, 2019 and September 30, 2020, a significant portion of cash and cash equivalents were held at a single institution.

Contingent Consideration Arrangements—Contingent consideration is payable in the form of cash and, in some cases, equity. Since the contingent consideration to be paid is based on the growth of forecasted financial

performance levels over a number of years, the Company cannot calculate the maximum contingent consideration that may be payable under these arrangements.

Legal and Regulatory Matters—In the ordinary course of business, the Company is involved in lawsuits and other claims. The Company has insurance to cover certain losses that arise in such matters; however, this insurance may not be sufficient to cover these losses. Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of any existing legal matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

From time to time, the Company’s subsidiaries receive requests for information from governmental authorities regarding business activities. The Company has cooperated and plans to continue to cooperate with all governmental agencies. The Company continues to believe that the resolution of any governmental inquiry will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Indemnifications—In the ordinary course of business, the Company enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.

Management believes that the likelihood of any material liability arising under these indemnification provisions is remote. Management cannot estimate any potential maximum exposure due to both the remoteness of any potential claims and the fact that items that would be included within any such calculated claim would be beyond the control of the Company. Consequently, no liability has been recorded in the unaudited condensed consolidated balance sheets.

CASH FLOW INFORMATION

9 Months Ended

Sep. 30, 2020

CASH FLOW INFORMATION

CASH FLOW INFORMATION

13. CASH FLOW INFORMATION


	Nine Months Ended
	September 30,
	2019		2020
Supplemental disclosures of cash flow information—cash paid for:
Interest	$	41,782	$	32,109
Income taxes	$	5,011	$	13,036
Supplemental non-cash cash flow information:
Fair market value of estimated contingent consideration in connection with acquisitions	$	70,209	$	8,963
Net tangible liabilities acquired in connection with business acquisitions	$	(2,636)	$	(7,599)
Discount on proceeds from Credit Facility	$	875	$	—
Operating lease assets	$	167,866	$	236,822
Operating lease liabilities	$	183,491	$	256,903

RELATED PARTIES

9 Months Ended

Sep. 30, 2020

RELATED PARTIES

RELATED PARTIES

14. RELATED PARTIES

The Company’s Chief Executive Officer, through an entity owned and controlled by him, owns a personal aircraft that was acquired without Company resources that he uses for business travel. The Company reimburses the Company’s Chief Executive Officer for certain costs and third party payments associated with the use of his personal aircraft for Company-related business travel. The Company also pays pilot fees for such business travel flights. During the three and nine months ended September 30, 2019, the Company recognized expenses of $498 and $1,568, respectively, related to these reimbursements. During the three and nine months ended September 30, 2020, the Company recognized expenses of $267 and $719, respectively, related to these reimbursements. Given the geography of the Company’s partner firms and prospects, the Company believes that the use of private aircraft creates efficiencies to enhance the productivity of the Company’s Chief Executive Officer and certain other authorized personnel.

At September 30, 2020, affiliates of certain holders of the Company’s Class A common stock and Class B common stock were lenders under the Credit Facility.

OTHER

9 Months Ended

Sep. 30, 2020

OTHER

OTHER

15. OTHER

During the three months ended March 31, 2019, the Company recorded a management contract buyout expense of $1,428 related to cash consideration for the buyout of a management agreement with one of the Company’s retiring principals whereby the business operations of the relevant partner firm were transitioned to one of the Company’s other partner firms.

SUMMARY OF ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2020

SUMMARY OF ACCOUNTING POLICIES

Basis of Presentation

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Use of Estimates

Revenue

Revenue


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2020		2019		2020
Domestic revenue	$	302,572	$	313,956	$	844,784	$	933,420
International revenue		14,069		17,527		33,326		48,226
Total revenue	$	316,641	$	331,483	$	878,110	$	981,646

International revenue consists of revenue generated by partner firm legal entities in Australia, Canada and the United Kingdom.

Derivatives

Derivatives

Recent Accounting Pronouncements

Recent Accounting Pronouncements

SUMMARY OF ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2020

SUMMARY OF ACCOUNTING POLICIES

Schedule of disaggregated revenues based on the location of the partner firm