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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2022

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 August 1, 2022, the registrant had 65,448,434 shares of Class A common stock and 12,035,266 shares of Class B common stock outstanding.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2022

    

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

7

Notes to unaudited condensed consolidated financial statements

8

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

44

Item 4.

Controls and Procedures

44

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 6.

Exhibits

46

SIGNATURES

46

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated balance sheets

(In thousands, except share and per share amounts)

    

December 31, 

    

June 30, 

2021

2022

ASSETS

 

  

 

  

Cash and cash equivalents

$

310,684

$

221,049

Accounts receivable less allowances of $3,255 at 2021 and $4,201 at 2022

 

198,827

 

206,909

Prepaid expenses and other assets

 

123,826

 

165,711

Fixed assets—net

 

47,199

 

46,856

Operating lease assets

249,850

254,853

Debt financing costs—net

 

4,254

 

4,169

Deferred tax assets—net

267,332

236,040

Goodwill

 

1,925,315

 

2,050,297

Other intangible assets—net

 

1,581,719

 

1,624,878

TOTAL ASSETS

$

4,709,006

$

4,810,762

LIABILITIES AND EQUITY

 

  

LIABILITIES

 

  

Accounts payable

$

11,580

$

16,228

Accrued expenses

 

72,572

 

91,885

Due to affiliates

 

105,722

 

53,905

Deferred revenue

 

10,932

 

10,117

Contingent consideration and other liabilities

 

468,284

 

370,775

Deferred tax liabilities

31,973

35,682

Operating lease liabilities

277,324

283,852

Borrowings under credit facilities (stated value of $2,407,302 and $2,494,954 at December 31, 2021 and June 30, 2022, respectively)

 

2,393,669

 

2,482,697

Tax receivable agreements obligations

219,542

216,765

TOTAL LIABILITIES

 

3,591,598

 

3,561,906

COMMITMENTS AND CONTINGENCIES (Note 12)

 

  

EQUITY

Class A common stock, par value $0.01, 500,000,000 shares authorized; 65,320,124 and 65,442,389 shares issued and outstanding at December 31, 2021 and June 30, 2022, respectively

653

654

Class B common stock, par value $0.01, 500,000,000 shares authorized; 11,439,019 and 12,034,104 shares issued and outstanding at December 31, 2021 and June 30, 2022, respectively

114

120

Additional paid-in capital

841,753

910,222

Retained earnings

24,995

87,180

Accumulated other comprehensive income

3,029

15,859

Total shareholders' equity

870,544

1,014,035

Non-controlling interest

246,864

234,821

Total equity

1,117,408

1,248,856

TOTAL LIABILITIES AND EQUITY

$

4,709,006

$

4,810,762

See notes to unaudited condensed consolidated financial statements

2

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of operations

(In thousands, except share and per share amounts)

For the three months ended

For the six months ended

June 30, 

June 30, 

    

2021

    

2022

    

2021

    

2022

REVENUES:

  

  

  

  

Wealth management fees

$

404,970

$

517,421

$

779,815

$

1,032,600

Other

 

20,385

 

21,790

 

39,715

 

43,178

 

Total revenues

 

425,355

 

539,211

 

819,530

 

1,075,778

 

OPERATING EXPENSES:

 

 

 

 

 

Compensation and related expenses

 

139,045

 

178,131

 

280,088

 

359,931

 

Management fees

 

116,205

 

136,802

 

218,277

 

274,641

 

Selling, general and administrative

 

69,018

 

94,771

 

132,844

 

183,421

 

Intangible amortization

 

44,003

 

64,649

 

86,986

 

124,925

 

Non-cash changes in fair value of estimated contingent consideration

 

34,062

 

(42,757)

 

59,998

 

(51,742)

 

Depreciation and other amortization

 

3,606

 

3,805

 

7,213

 

7,438

 

Total operating expenses

 

405,939

 

435,401

 

785,406

 

898,614

 

INCOME FROM OPERATIONS

 

19,416

 

103,810

 

34,124

 

177,164

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

Interest income

 

57

 

17

 

104

 

20

 

Interest expense

 

(10,829)

 

(19,892)

 

(21,350)

 

(37,508)

 

Amortization of debt financing costs

 

(902)

 

(949)

 

(1,754)

 

(2,050)

 

Other expense—net

 

(534)

 

(1,451)

 

(531)

 

(1,487)

 

Income from equity method investments

140

11

423

106

Total other expense—net

 

(12,068)

 

(22,264)

 

(23,108)

 

(40,919)

 

INCOME BEFORE INCOME TAX

 

7,348

81,546

 

11,016

 

136,245

 

INCOME TAX EXPENSE

 

2,174

32,228

 

3,360

 

47,845

 

NET INCOME

5,174

49,318

7,656

88,400

Non-controlling interest

(3,197)

(16,235)

(5,423)

(26,215)

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

1,977

$

33,083

$

2,233

$

62,185

Income per share of Class A common stock:

Basic

$

0.04

$

0.51

$

0.04

$

0.95

Diluted

$

0.04

$

0.50

$

0.04

$

0.95

Weighted average shares of Class A common stock outstanding:

Basic

55,710,666

65,389,642

53,965,045

65,360,667

Diluted

56,162,822

65,596,377

54,418,520

65,682,081

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

For the six months ended

 

June 30, 

June 30, 

    

2021

    

2022

    

2021

    

2022

 

Net income

$

5,174

$

49,318

$

7,656

$

88,400

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

(378)

 

(11,175)

 

(819)

 

(7,425)

Unrealized gain on interest rate swaps designated as cash flow hedges

254

5,335

5,505

24,101

Comprehensive income

5,050

43,478

12,342

105,076

Less: Comprehensive income attributable to non-controlling interest

(3,256)

(15,005)

(7,208)

(30,061)

Comprehensive income attributable to common shareholders

$

1,794

$

28,473

$

5,134

$

75,015

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 six months ended

June 30, 

    

2021

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

7,656

$

88,400

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

 

 

  

Intangible amortization

 

86,986

 

124,925

Depreciation and other amortization

 

7,213

 

7,438

Amortization of debt financing costs

 

1,754

 

2,050

Non-cash equity compensation expense

 

18,631

 

14,210

Non-cash changes in fair value of estimated contingent consideration

 

59,998

 

(51,742)

Income from equity method investments

 

(423)

 

(106)

Distributions received from equity method investments

 

403

 

776

Deferred taxes and other non-cash items

 

1,425

 

29,576

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

 

 

  

Accounts receivable

 

(10,038)

 

(9,398)

Prepaid expenses and other assets

 

(14,450)

 

(9,776)

Accounts payable

 

(527)

 

4,778

Accrued expenses

 

16,883

 

21,446

Due to affiliates

 

(9,765)

 

(51,962)

Contingent consideration and other liabilities

 

(13,986)

 

(40,201)

Deferred revenue

 

200

 

(1,122)

Net cash provided by operating activities

 

151,960

 

129,292

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

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

 

(82,106)

 

(252,056)

Purchase of fixed assets

 

(4,318)

 

(6,429)

Investment and other, net

 

(19,132)

 

(5,232)

Net cash used in investing activities

 

(105,556)

 

(263,717)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Borrowings under credit facilities

 

524,375

 

100,000

Repayments of borrowings under credit facilities

 

(413,347)

 

(12,348)

Proceeds from issuance of common stock, net

25,767

Payments in connection with unit redemption, net

(25,767)

Payments in connection with tax receivable agreements

(4,423)

(3,856)

Contingent consideration paid

 

(57,030)

 

(21,397)

Payments of debt financing costs

 

(2,700)

 

(1,111)

Proceeds from exercise of stock options

4,017

422

Distributions for unitholders

(19,108)

(15,956)

Other

(39)

375

Net cash provided by financing activities

 

31,745

 

46,129

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

(26)

 

(1,339)

CHANGE IN CASH AND CASH EQUIVALENTS

 

78,123

 

(89,635)

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

65,858

 

310,684

End of period

$

143,981

$

221,049

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 June 30, 2021 and 2022

(In thousands, except share amounts)

Accumulated

 

Class A

Class B

Additional

Other

Total

Common Stock

Common Stock

Paid-In

Retained

Comprehensive

Shareholders’

Non-controlling

    

Shares

    

Amount

    

Shares

    

Amount

    

 Capital

    

Earnings

    

Income

    

Equity

    

Interest

    

Total  Equity

Balance at April 1, 2021

55,114,842

$

551

17,019,104

$

170

$

590,022

$

14,839

$

917

$

606,499

$

271,148

$

877,647

Net income

1,977

1,977

3,197

5,174

Issuance of units in connection with an acquisition and contingent consideration

168,392

1

1

1

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

3,927,729

39

(3,845,569)

(38)

195,875

195,876

195,876

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

649,187

6

(649,187)

(6)

32,907

32,907

32,907

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

64,167

1

3,252

3,253

3,253

Exercise of stock options

36,964

1

1,153

1,154

1,154

Change in non-controlling interest allocation

(183,649)

(183,649)

(44,015)

(227,664)

Non-cash equity compensation expenses

1,126

1,126

1,126

Currency translation adjustment-net of tax

(469)

(469)

91

(378)

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

286

286

(32)

254

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

9,735

9,735

9,735

Balance at June 30, 2021

59,792,889

$

598

12,692,740

$

127

$

650,421

$

16,816

$

734

$

668,696

$

230,389

$

899,085

Balance at April 1, 2022

65,362,389

653

11,601,814

116

865,857

54,097

20,469

$

941,192

$

241,426

$

1,182,618

Net income

33,083

33,083

16,235

49,318

Issuance of units in connection with an acquisition

512,290

5

5

5

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

80,000

1

(80,000)

(1)

3,016

3,016

3,016

Change in non-controlling interest allocation

40,862

40,862

(21,610)

19,252

Non-cash equity compensation expenses

2,105

2,105

2,105

Currency translation adjustment-net of tax

(8,823)

(8,823)

(2,352)

(11,175)

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

4,213

4,213

1,122

5,335

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

(1,618)

(1,618)

(1,618)

Balance at June 30, 2022

65,442,389

$

654

12,034,104

$

120

$

910,222

$

87,180

$

15,859

$

1,014,035

$

234,821

$

1,248,856

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Six months ended June 30, 2021 and 2022

(In thousands, except share amounts)

Accumulated

Class A

Class B

Additional

Other

Total

Common Stock

Common Stock

Paid-In

Retained

Comprehensive

Shareholders’

Non-controlling

    

Shares

    

Amount

    

Shares

    

Amount

    

 Capital

    

Earnings

    

Income

    

Equity

    

Interest

    

Total Equity

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

2,233

2,233

5,423

7,656

Issuance of units in connection with an acquisition and contingent consideration

168,392

1

1

1

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

6,568,098

65

(6,306,301)

(63)

317,858

317,860

317,860

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

1,830,946

18

(1,830,946)

(18)

87,776

87,776

87,776

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

134,632

2

6,523

6,525

6,525

Exercise of stock options

100,501

1

3,175

3,176

3,176

Change in non-controlling interest allocation

(309,485)

(309,485)

(95,899)

(405,384)

Non-cash equity compensation expenses

2,290

2,290

2,290

Currency translation adjustment-net of tax

(781)

(781)

(38)

(819)

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

3,682

3,682

1,823

5,505

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

15,620

15,620

15,620

Balance at June 30, 2021

59,792,889

$

598

12,692,740

$

127

$

650,421

$

16,816

$

734

$

668,696

$

230,389

$

899,085

Balance at January 1, 2022

65,320,124

$

653

11,439,019

$

114

$

841,753

$

24,995

$

3,029

$

870,544

$

246,864

$

1,117,408

Net income

62,185

62,185

26,215

88,400

Issuance of units in connection with an acquisition and contingent consideration

700,085

7

7

7

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

105,000

1

(105,000)

(1)

4,123

4,123

4,123

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

1,956

87

87

87

Exercise of stock options

15,309

422

422

422

Change in non-controlling interest allocation

64,609

64,609

(42,104)

22,505

Non-cash equity compensation expenses

4,097

4,097

4,097

Currency translation adjustment-net of tax

(5,908)

(5,908)

(1,517)

(7,425)

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

18,738

18,738

5,363

24,101

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

(4,869)

(4,869)

(4,869)

Balance at June 30, 2022

65,442,389

$

654

12,034,104

$

120

$

910,222

$

87,180

$

15,859

$

1,014,035

$

234,821

$

1,248,856

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements

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

1. GENERAL

Organization and Business— Focus Financial Partners Inc. (“Focus Inc.”) was formed as a Delaware corporation on July 29, 2015. Focus Inc. is the managing member of Focus Financial Partners, LLC (“Focus LLC”) and operates and controls the businesses and affairs of Focus LLC.

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 (the “Operating Agreement”). Focus LLC is in the business of acquiring and overseeing independent fiduciary wealth management and related businesses.

The unaudited condensed consolidated financial statements reflect the results of operations and financial position of Focus Inc. and its subsidiaries (the “Company”).

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 Focus Inc. and its majority and wholly owned subsidiaries. Focus Inc. consolidates Focus LLC and its subsidiaries’ financial statements and records the interests in Focus LLC consisting of common units, restricted common units and the common unit equivalent of incentive units of Focus LLC that Focus Inc. 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 17, 2022.

Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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

Six Months Ended

June 30, 

June 30, 

    

2021

    

2022

    

2021

    

2022

Domestic revenue

$

399,191

$

510,374

$

770,145

$

1,017,685

International revenue

 

26,164

 

28,837

 

49,385

 

58,093

Total revenue

$

425,355

$

539,211

$

819,530

$

1,075,778

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

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

3. NON-CONTROLLING INTEREST AND INCOME PER SHARE

The calculation of controlling and non-controlling interest is as follows as of June 30, 2021 and 2022:

    

2021

2022

Focus LLC common units

    

12,692,740

12,034,104

Focus LLC restricted common units

71,374

193,625

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

8,187,932

4,347,399

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

20,952,046

16,575,128

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

80,744,935

82,017,517

Non-controlling interest allocation

25.9

%

20.2

%

Company’s interest in Focus LLC

74.1

%

79.8

%

(1)Focus LLC common units issuable upon conversion of 16,464,675 and 16,202,274 (see Note 9) vested and unvested Focus LLC incentive units outstanding as of June 30, 2021 and 2022, respectively, was calculated

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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)

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.

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. The calculation of basic income per share is as follows:

Three Months Ended

Six Months Ended

    

June 30, 

June 30, 

2021

    

2022

    

2021

    

2022

Net income attributable to common shareholders

$

1,977

$

33,083

$

2,233

$

62,185

Weighted average shares of Class A common stock outstanding

 

55,710,666

 

65,389,642

 

53,965,045

 

65,360,667

Basic income per share

$

0.04

$

0.51

$

0.04

$

0.95

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, restricted stock units and Focus LLC common units, including contingently issuable Focus LLC common units, if any, restricted common units and incentive units as calculated using the treasury stock method:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2022

    

2021

    

2022

Net income attributable to common shareholders

$

1,977

$

33,083

$

2,233

$

62,185

Weighted average shares of Class A common stock outstanding

 

55,710,666

 

65,389,642

 

53,965,045

 

65,360,667

Effect of dilutive stock options

405,554

190,235

410,298

298,647

Effect of dilutive restricted stock units

46,602

16,500

43,177

22,767

Total

 

56,162,822

 

65,596,377

 

54,418,520

 

65,682,081

Diluted income per share

$

0.04

$

0.50

$

0.04

$

0.95

Diluted income per share for the three and six months ended June 30, 2021 and 2022 excludes shares related to 155,000 market-based stock options, as modified, that vest on the sixth anniversary of the pricing of the Company’s initial public offering (“IPO”) with vesting based on the highest volume weighted average per share price for any ninety-calendar day period (“90-day VWAP”) prior to the anniversary, with 0% vesting if the highest 90-day VWAP is $80.00 or less and 100% vesting if the highest 90-day VWAP is $110.00 or more, with linear interpolation in between (see Note 9). Such market-based criteria were not met at June 30, 2021 and 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)

Focus LLC common, restricted 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 and six months ended June 30, 2021 and 2022, 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 FASB Accounting Standards Codification (“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 six months ended June 30, 2022 is as follows:

    

2022

Number of business acquisitions closed

    

5

Consideration:

Cash due at closing

$

246,861

Cash due subsequent to closing at net present value

9,611

Fair market value of Focus LLC common units issued at closing

23,432

Fair market value of estimated contingent consideration

18,474

Total consideration

$

298,378

Allocation of purchase price:

Total tangible assets

$

5,134

Total liabilities assumed

(3,747)

Customer relationships

160,600

Management contracts

5,020

Goodwill

129,797

Other acquired intangibles

1,574

Total allocated consideration

$

298,378

Management believes approximately $256,825 of tax goodwill and intangibles related to business acquisitions completed during the six months ended June 30, 2022 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 six months ended June 30, 2022 includes revenue and income from operations for the one business acquisition that is a new subsidiary partner firm from the acquisition date of $4,547 and $503, respectively.

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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)

Asset Acquisition

The Company 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. Total purchase consideration for asset acquisitions during the six months ended June 30, 2022 consisted of cash of $875 and 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 six months ended June 30, 2022 are as follows:

    

Number of years

Customer relationships

9

Management contracts

6

Other acquired intangibles

5

Weighted-average useful life of all intangibles acquired

9

From July 1, 2022 to August 4, 2022, the Company completed 6 business acquisitions for cash of $107,158 plus contingent consideration.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the change in the goodwill balances for the year ended December 31, 2021 and the six months ended June 30, 2022:

    

December 31, 

    

June 30, 

2021

2022

Balance beginning of period:

Goodwill

$

1,278,183

$

1,947,939

Cumulative impairment losses

 

(22,624)

(22,624)

1,255,559

1,925,315

Goodwill acquired

 

677,195

129,797

Other

 

(7,439)

(4,815)

 

669,756

124,982

Balance end of period:

Goodwill