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 | (I.R.S. Employer |
875 Third Avenue, 28th Floor New York, NY | 10022 |
(Address of Principal Executive Offices) | (Zip Code) |
(646) 519-2456
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Class A common stock, par value | 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.
FOCUS FINANCIAL PARTNERS INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2022
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 and 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 and 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
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
3
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
4
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
5
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
6
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
7
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.
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:
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:
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:
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 | ||||||