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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 March 31, 2021

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 May 3, 2021, the registrant had 55,114,842 shares of Class A common stock and 17,025,646 shares of Class B common stock outstanding.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2021

    

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

4

Unaudited condensed consolidated statements of cash flows

5

Unaudited condensed consolidated statements of changes in equity

6

Notes to unaudited condensed consolidated financial statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4.

Controls and Procedures

43

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 6.

Exhibits

44

SIGNATURES

45

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, 

    

March 31, 

2020

2021

ASSETS

 

  

 

  

Cash and cash equivalents

$

65,858

$

169,715

Accounts receivable less allowances of $2,178 at 2020 and $2,135 at 2021

 

169,220

 

176,558

Prepaid expenses and other assets

 

65,581

 

87,594

Fixed assets—net

 

49,209

 

48,711

Operating lease assets

229,748

229,132

Debt financing costs—net

 

6,950

 

6,276

Deferred tax assets—net

107,289

160,247

Goodwill

 

1,255,559

 

1,253,976

Other intangible assets—net

 

1,113,467

 

1,082,254

TOTAL ASSETS

$

3,062,881

$

3,214,463

LIABILITIES AND EQUITY

 

  

LIABILITIES

 

  

Accounts payable

$

9,634

$

7,809

Accrued expenses

 

53,862

 

55,626

Due to affiliates

 

66,428

 

26,638

Deferred revenue

 

9,190

 

9,783

Other liabilities

 

222,911

 

238,089

Operating lease liabilities

253,295

255,145

Borrowings under credit facilities (stated value of $1,507,622 and $1,623,449 at December 31, 2020 and March 31, 2021, respectively)

 

1,507,119

 

1,619,831

Tax receivable agreements obligations

81,563

123,895

TOTAL LIABILITIES

 

2,204,002

 

2,336,816

COMMITMENTS AND CONTINGENCIES (Note 12)

 

  

EQUITY

Class A common stock, par value $0.01, 500,000,000 shares authorized; 51,158,712 and 55,114,842 shares issued and outstanding at December 31, 2020 and March 31, 2021, respectively

512

551

Class B common stock, par value $0.01, 500,000,000 shares authorized; 20,661,595 and 17,019,104 shares issued and outstanding at December 31, 2020 and March 31, 2021, respectively

207

170

Additional paid-in capital

526,664

590,022

Retained earnings

14,583

14,839

Accumulated other comprehensive income (loss)

(2,167)

917

Total shareholders' equity

539,799

606,499

Non-controlling interest

319,080

271,148

Total equity

858,879

877,647

TOTAL LIABILITIES AND EQUITY

$

3,062,881

$

3,214,463

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of operations

(In thousands, except share and per share amounts)

For the three months ended

March 31, 

    

2020

    

2021

REVENUES:

  

  

Wealth management fees

$

318,603

$

374,845

Other

 

18,451

 

19,330

 

Total revenues

 

337,054

 

394,175

 

OPERATING EXPENSES:

 

 

 

Compensation and related expenses

 

117,844

 

141,043

 

Management fees

 

83,693

 

102,072

 

Selling, general and administrative

 

62,595

 

63,826

 

Intangible amortization

 

35,723

 

42,983

 

Non-cash changes in fair value of estimated contingent consideration

 

(31,373)

 

25,936

 

Depreciation and other amortization

 

2,982

 

3,607

 

Total operating expenses

 

271,464

 

379,467

 

INCOME FROM OPERATIONS

 

65,590

 

14,708

 

OTHER INCOME (EXPENSE):

 

 

 

Interest income

 

285

 

47

 

Interest expense

 

(13,586)

 

(10,521)

 

Amortization of debt financing costs

 

(782)

 

(852)

 

Loss on extinguishment of borrowings

 

(6,094)

 

 

Other income—net

 

612

 

3

 

Income from equity method investments

64

283

Total other expense—net

 

(19,501)

 

(11,040)

 

INCOME BEFORE INCOME TAX

 

46,089

 

3,668

 

INCOME TAX EXPENSE

 

12,070

 

1,186

 

NET INCOME

34,019

2,482

Non-controlling interest

(13,623)

(2,226)

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

20,396

$

256

Income per share of Class A common stock:

Basic

$

0.43

$

0.00

Diluted

$

0.43

$

0.00

Weighted average shares of Class A common stock outstanding:

Basic

47,436,555

52,200,029

Diluted

47,441,172

52,654,822

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of comprehensive income

(In thousands)

For the three months ended

 

March 31, 

    

2020

    

2021

 

Net income

$

34,019

$

2,482

Other comprehensive income (loss), net of tax:

 

 

 

Foreign currency translation adjustments

 

(8,565)

 

(441)

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

(2,944)

5,251

Comprehensive income

22,510

7,292

Less: Comprehensive income attributable to noncontrolling interest

(9,561)

(3,952)

Comprehensive income attributable to common shareholders

$

12,949

$

3,340

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)

For the three months ended

March 31, 

    

2020

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

34,019

$

2,482

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

 

 

  

Intangible amortization

 

35,723

 

42,983

Depreciation and other amortization

 

2,982

 

3,607

Amortization of debt financing costs

 

782

 

852

Non-cash equity compensation expense

 

5,034

 

12,356

Non-cash changes in fair value of estimated contingent consideration

 

(31,373)

 

25,936

Income from equity method investments

 

(64)

 

(283)

Distributions received from equity method investments

 

25

 

176

Deferred taxes and other non-cash items

 

4,104

 

436

Loss on extinguishment of borrowings

 

6,094

 

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

 

 

  

Accounts receivable

 

(9,047)

 

(7,393)

Prepaid expenses and other assets

 

(1,705)

 

(5,098)

Accounts payable

 

1,281

 

(1,637)

Accrued expenses

 

(1,612)

 

2,169

Due to affiliates

 

(41,785)

 

(39,818)

Other liabilities

 

(2,815)

 

(3,023)

Deferred revenue

 

1,739

 

383

Net cash provided by operating activities

 

3,382

 

34,128

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

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

 

(52,188)

 

(7,925)

Purchase of fixed assets

 

(3,188)

 

(2,835)

Investment and other, net

 

 

(17,500)

Net cash used in investing activities

 

(55,376)

 

(28,260)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Borrowings under credit facilities

 

285,000

 

524,375

Repayments of borrowings under credit facilities

 

(37,892)

 

(409,173)

Proceeds from issuance of common stock, net

12,119

Payments in connection with unit redemption, net

(12,119)

Payments in connection with tax receivable agreements

(4,112)

Contingent consideration paid

 

(21,428)

 

(4,172)

Payments of debt financing costs

 

(634)

 

(2,700)

Proceeds from exercise of stock options

77

2,863

Payments on finance lease obligations

(34)

(33)

Distributions for unitholders

 

(4,567)

 

(9,055)

Net cash provided by financing activities

 

220,522

 

97,993

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

(667)

 

(4)

CHANGE IN CASH AND CASH EQUIVALENTS

 

167,861

 

103,857

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

65,178

 

65,858

End of period

$

233,039

$

169,715

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 equity

Three months ended March 31, 2020 and 2021

(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)

    

Income (Loss)

    

Equity

    

Interest

    

Total  Equity

Balance at January 1, 2020

47,421,315

$

474

22,075,749

$

221

$

498,186

$

(13,462)

$

(1,299)

$

484,120

$

319,850

$

803,970

Net income

20,396

20,396

13,623

34,019

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

316,370

3

(316,370)

(3)

6,036

6,036

6,036

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

66,631

1

1,271

1,272

1,272

Exercise of stock options

2,713

77

77

77

Change in non-controlling interest allocation

14,087

14,087

(21,530)

(7,443)

Non-cash equity compensation expenses

1,017

1,017

1,017

Currency translation adjustment-net of tax

(5,524)

(5,524)

(3,041)

(8,565)

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

(1,923)

(1,923)

(1,021)

(2,944)

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

(393)

(393)

(393)

Balance at March 31, 2020

47,807,029

$

478

21,759,379

$

218

$

520,281

$

6,934

$

(8,746)

$

519,165

$

307,881

$

827,046

Balance at January 1, 2021

51,158,712

$

512

20,661,595

$

207

$

526,664

$

14,583

$

(2,167)

$

539,799

$

319,080

$

858,879

Net income

256

256

2,226

2,482

Issuance (cancellation) of common stock in connection with offering, net

2,640,369

26

(2,460,732)

(25)

121,983

121,984

121,984

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

1,181,759

12

(1,181,759)

(12)

54,869

54,869

54,869

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

70,465

1

3,271

3,272

3,272

Exercise of stock options

63,537

2,022

2,022

2,022

Change in non-controlling interest allocation

(125,836)

(125,836)

(51,884)

(177,720)

Non-cash equity compensation expenses

1,164

1,164

1,164

Currency translation adjustment-net of tax

(312)

(312)

(129)

(441)

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

3,396

3,396

1,855

5,251

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

5,885

5,885

5,885

Balance at March 31, 2021

55,114,842

$

551

17,019,104

$

170

$

590,022

$

14,839

$

917

$

606,499

$

271,148

$

877,647

See notes to unaudited condensed consolidated financial statements

6

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements

(In thousands, except unit data, share and per share amounts)

1. GENERAL

Organization and Business— Focus Financial Partners Inc. (the “Company”) was formed as a Delaware corporation on July 29, 2015 for the sole purpose of completing the initial public offering (“IPO”) and reorganization transactions (“Reorganization Transactions”) in order to carry on the business of Focus Financial Partners, LLC (“Focus LLC”) and its subsidiaries. On July 30, 2018, the Company became the managing member of Focus LLC and operates and controls the businesses and affairs of Focus LLC and its subsidiaries.

Focus LLC is a Delaware limited liability company that was formed in November 2004. Focus LLC’s subsidiaries commenced revenue-generating and acquisition activities in January 2006. Focus LLC’s activities are governed by its Fourth Amended and Restated Operating Agreement (as amended, the “Operating Agreement”).

Focus LLC is in the business of acquiring and overseeing independent fiduciary wealth management and related businesses.

2. SUMMARY OF ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for fair presentation have been included. The unaudited condensed consolidated financial statements include the accounts of the Company and its majority and wholly owned subsidiaries. The Company consolidates Focus LLC and its subsidiaries’ financial statements and records the interests in Focus LLC consisting of common units and the common unit equivalent of incentive units of Focus LLC that the Company does not own as non-controlling interests, (see Note 3). Intercompany transactions and balances have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 19, 2021.

Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

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.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

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

March 31, 

    

2020

    

2021

Domestic revenue

$

321,983

$

370,954

International revenue

 

15,071

 

23,221

Total revenue

$

337,054

$

394,175

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

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification (“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 adoption of ASU No. 2019-12 on January 1, 2021 did not have a material effect 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.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

3. NON-CONTROLLING INTEREST AND INCOME PER SHARE

The calculation of controlling and non-controlling interest is as follows as of March 31, 2020 and 2021:

    

2020

2021

Focus LLC common units held by continuing owners

    

21,759,379

17,019,104

Focus LLC restricted common units

71,374

Common unit equivalents of outstanding vested and unvested incentive units(1)

3,623,660

7,006,625

Total common units, restricted common units and common unit equivalents attributable to non-controlling interest

25,383,039

24,097,103

Total common units, restricted common units and common unit equivalents of incentive units outstanding

73,190,068

79,211,945

Non-controlling interest allocation

34.7

%

30.4

%

Company’s interest in Focus LLC

65.3

%

69.6

%

(1)Focus LLC common units issuable upon conversion of 19,369,928 and 16,728,882 (see Note 9) vested and unvested Focus LLC incentive units outstanding as of March 31, 2020 and 2021, 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 calculation of basic and diluted income per share is described below:

Basic income per share is calculated utilizing net income attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periods:

Three Months Ended

March 31, 

    

2020

    

2021

Basic income per share:

  

  

Net income attributable to common shareholders

$

20,396

$

256

Weighted average shares of Class A common stock outstanding

 

47,436,555

 

52,200,029

Basic income per share

$

0.43

$

0.00

Diluted income per share is calculated utilizing net income 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

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

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

Three Months Ended

March 31, 

    

2020

    

2021

Diluted income per share:

 

  

  

Net income attributable to common shareholders

$

20,396

$

256

Weighted average shares of Class A common stock outstanding

 

47,436,555

 

52,200,029

Effect of dilutive stock options

2,573

415,041

Effect of dilutive unvested Class A common stock

2,044

Effect of dilutive restricted stock units

39,752

Total

 

47,441,172

 

52,654,822

Diluted income per share

$

0.43

$

0.00

Diluted income per share for the three months ended March 31, 2020 and 2021 excludes shares related to 155,000 market-based stock options that vest on the fifth anniversary of the pricing of the Company’s IPO if the volume weighted average per share price for any ninety-calendar day period within such five-year period immediately following the pricing of the IPO reaches at least $100. Such market-based criteria were not met at March 31, 2020 and 2021.

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 per share, net income 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 months ended March 31, 2020 and 2021, such exchange is not reflected in diluted net income per share as the assumed exchange is not dilutive.

4. ACQUISITIONS

Business Acquisitions

Business acquisitions are accounted for in accordance with ASC Topic 805: Business Combinations.

The Company has incorporated contingent consideration, or earn out provisions, into the structure of its acquisitions. The Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of the consideration transferred in the exchange. The contingent consideration is remeasured to fair value at each

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

reporting date until the contingency is resolved. The purchase price associated with business acquisitions and the allocation thereof during the three months ended March 31, 2021 is as follows:

Number of business acquisitions closed

    

2

Consideration:

Cash due at closing

$

7,664

Fair market value of estimated contingent consideration

6,187

Total consideration

$

13,851

Allocation of purchase price:

Total tangible assets

$

1,288

Total liabilities assumed

(829)

Customer relationships

11,229

Management contract

280

Goodwill

1,883

Total allocated consideration

$

13,851

Management believes approximately $7,335 of tax goodwill and intangibles related to business acquisitions completed during the three months ended March 31, 2021 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 three months ended March 31, 2021 includes revenue and loss from operations for the one business acquisition that is a new subsidiary partner firm from the acquisition date of $241 and $(73), respectively.

The weighted-average useful lives of intangible assets acquired during the three months ended March 31, 2021 through business acquisitions are as follows:

    

Number of years

Management contract

20

Customer relationships

9

Weighted-average useful life of all intangibles acquired

9

From April 1, 2021 to May 6, 2021, the Company completed 5 business acquisitions for cash and equity of $74,687, plus contingent consideration.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the change in the goodwill balances for the year ended December 31, 2020 and the three months ended March 31, 2021:

    

December 31, 

    

March 31, 

2020

2021

Balance beginning of period:

Goodwill

$

1,112,855

$

1,278,183

Cumulative impairment losses

 

(22,624)

(22,624)

1,090,231

1,255,559

Goodwill acquired

 

160,341

1,883

Other

 

4,987

(3,466)

 

165,328

(1,583)

Balance end of period:

Goodwill

 

1,278,183

1,276,600

Cumulative impairment losses

 

(22,624)

(22,624)

$

1,255,559

$

1,253,976

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

Gross Carry

Accumulated

Net Book

    

Amount

    

Amortization

    

Value

Customer relationships

$

1,610,971

$

(612,037)

$

998,934

Management contracts

 

158,526

 

(47,881)

 

110,645

Other acquired intangibles

 

7,733

 

(3,845)

 

3,888

Total

$

1,777,230

$

(663,763)

$

1,113,467

The following table summarizes the amortizing acquired intangible assets at March 31, 2021:

    

Gross Carry

    

Accumulated

    

Net Book

Amount

Amortization

Value

Customer relationships

$

1,622,173

(652,363)

969,810

Management contracts

 

158,819

(49,991)

108,828

Other acquired intangibles

 

7,740

(4,124)

3,616

Total

$

1,788,732

$

(706,478)

$

1,082,254

6. FAIR VALUE MEASUREMENTS

ASC Topic 820, Fair Value Measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances.

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

Level 1—Unadjusted price quotations in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Significant unobservable inputs that are not corroborated by market data.

Marketable securities

At March 31, 2021, the fair value of the Company’s investment in a mutual fund was $17,619. The fair value was determined using Level 1 inputs.

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, 2020 and March 31, 2021 are as follows:

December 31, 2020

March 31, 2021

    

Stated

    

Fair

    

Stated

    

Fair

Value

Value

Value

Value

First Lien Term Loan

$

1,127,622

$

1,120,574

$

1,623,449

$

1,605,185

Derivatives

At December 31, 2020 and March 31, 2021, the fair value of the Company’s $850,000 notional amount interest rate swap agreements was $(10,400) and $(4,116), respectively. 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.

13

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

The following table represents changes in the fair value of estimated contingent consideration for business acquisitions for the year ended December 31, 2020 and the three months ended March 31, 2021:

Balance at January 1, 2020

    

$

183,568

Additions to estimated contingent consideration

46,918

Payments of contingent consideration

(80,803)

Non-cash changes in fair value of estimated contingent consideration

19,197

Other

790

Balance at December 31, 2020

$

169,670

Additions to estimated contingent consideration

6,187

Payments of contingent consideration

(9,448)

Non-cash changes in fair value of estimated contingent consideration

25,936

Other

(218)

Balance at March 31, 2021

$

192,127

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

During the year ended December 31, 2020, the Company paid $80,803 in cash as contingent consideration associated with business acquisitions. During the three months ended March 31, 2021, the Company paid $9,448 in cash as contingent consideration associated with business acquisitions. In addition, the Company also paid $382 and $591 of contingent consideration for the three months ended March 31, 2020 and 2021, 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, 2020 and March 31, 2021 are summarized below:

Quantitative Information About Level 3

 

Fair Value Measurements

 

Fair Value at

    

Valuation

    

Unobservable

    

 

December 31, 2020

Techniques

Inputs

Ranges

 

$

169,670

Monte Carlo Simulation Model

Forecasted growth rates

(33.6)% - 20.9

%

Discount rates

10.0% - 18.0

%

14

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

Quantitative Information About Level 3

 

Fair Value Measurements

 

Fair Value at

    

Valuation

    

Unobservable

    

 

March 31, 2021

Techniques

Inputs

Ranges

 

$

192,127

Monte Carlo Simulation Model

Forecasted growth rates

(27.7)% - 25.2

%

Discount rates

9.0% - 16.0

%

7. CREDIT FACILITY

As of March 31, 2021, Focus LLC’s credit facility