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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, 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 May 2, 2022, the registrant had 65,362,389 shares of Class A common stock and 12,114,104 shares of Class B common stock outstanding.

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 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

6

Notes to unaudited condensed consolidated financial statements

7

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

Item 4.

Controls and Procedures

41

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 6.

Exhibits

43

SIGNATURES

43

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, 

2021

2022

ASSETS

 

  

 

  

Cash and cash equivalents

$

310,684

$

317,034

Accounts receivable less allowances of $3,255 at 2021 and $3,696 at 2022

 

198,827

 

209,209

Prepaid expenses and other assets

 

123,826

 

161,997

Fixed assets—net

 

47,199

 

46,832

Operating lease assets

249,850

256,064

Debt financing costs—net

 

4,254

 

3,580

Deferred tax assets—net

267,332

258,228

Goodwill

 

1,925,315

 

1,928,135

Other intangible assets—net

 

1,581,719

 

1,525,002

TOTAL ASSETS

$

4,709,006

$

4,706,081

LIABILITIES AND EQUITY

 

  

LIABILITIES

 

  

Accounts payable

$

11,580

$

14,719

Accrued expenses

 

72,572

 

75,956

Due to affiliates

 

105,722

 

28,808

Deferred revenue

 

10,932

 

12,742

Contingent consideration and other liabilities

 

468,284

 

415,942

Deferred tax liabilities

31,973

36,501

Operating lease liabilities

277,324

284,613

Borrowings under credit facilities (stated value of $2,407,302 and $2,451,128 at December 31, 2021 and March 31, 2022, respectively)

 

2,393,669

 

2,438,183

Tax receivable agreements obligations

219,542

215,999

TOTAL LIABILITIES

 

3,591,598

 

3,523,463

COMMITMENTS AND CONTINGENCIES (Note 12)

 

  

EQUITY

Class A common stock, par value $0.01, 500,000,000 shares authorized; 65,320,124 and 65,362,389 shares issued and outstanding at December 31, 2021 and March 31, 2022, respectively

653

653

Class B common stock, par value $0.01, 500,000,000 shares authorized; 11,439,019 and 11,601,814 shares issued and outstanding at December 31, 2021 and March 31, 2022, respectively

114

116

Additional paid-in capital

841,753

865,857

Retained earnings

24,995

54,097

Accumulated other comprehensive income

3,029

20,469

Total shareholders' equity

870,544

941,192

Non-controlling interest

246,864

241,426

Total equity

1,117,408

1,182,618

TOTAL LIABILITIES AND EQUITY

$

4,709,006

$

4,706,081

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

March 31, 

    

2021

    

2022

REVENUES:

  

  

Wealth management fees

$

374,845

$

515,179

Other

 

19,330

 

21,388

 

Total revenues

 

394,175

 

536,567

 

OPERATING EXPENSES:

 

 

 

Compensation and related expenses

 

141,043

 

181,800

 

Management fees

 

102,072

 

137,839

 

Selling, general and administrative

 

63,826

 

88,650

 

Intangible amortization

 

42,983

 

60,276

 

Non-cash changes in fair value of estimated contingent consideration

 

25,936

 

(8,985)

 

Depreciation and other amortization

 

3,607

 

3,633

 

Total operating expenses

 

379,467

 

463,213

 

INCOME FROM OPERATIONS

 

14,708

 

73,354

 

OTHER INCOME (EXPENSE):

 

 

 

Interest income

 

47

 

3

 

Interest expense

 

(10,521)

 

(17,616)

 

Amortization of debt financing costs

 

(852)

 

(1,101)

 

Other income (expense)—net

 

3

 

(36)

 

Income from equity method investments

283

95

Total other expense—net

 

(11,040)

 

(18,655)

 

INCOME BEFORE INCOME TAX

 

3,668

 

54,699

 

INCOME TAX EXPENSE

 

1,186

 

15,617

 

NET INCOME

2,482

39,082

Non-controlling interest

(2,226)

(9,980)

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

256

$

29,102

Income per share of Class A common stock:

Basic

$

0.00

$

0.45

Diluted

$

0.00

$

0.44

Weighted average shares of Class A common stock outstanding:

Basic

52,200,029

65,331,370

Diluted

52,654,822

65,767,463

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

 

March 31, 

    

2021

    

2022

 

Net income

$

2,482

$

39,082

Other comprehensive income (loss), net of tax:

 

 

 

Foreign currency translation adjustments

 

(441)

 

3,750

Unrealized gain on interest rate swaps designated as cash flow hedges

5,251

18,766

Comprehensive income

7,292

61,598

Less: Comprehensive income attributable to non-controlling interest

(3,952)

(15,056)

Comprehensive income attributable to common shareholders

$

3,340

$

46,542

See notes to unaudited condensed consolidated financial statements

4

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)

For the three months ended

March 31, 

    

2021

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

2,482

$

39,082

Adjustments to reconcile net income to net cash provided by (used in) operating activities—net of effect of acquisitions:

 

 

  

Intangible amortization

 

42,983

 

60,276

Depreciation and other amortization

 

3,607

 

3,633

Amortization of debt financing costs

 

852

 

1,101

Non-cash equity compensation expense

 

12,356

 

6,707

Non-cash changes in fair value of estimated contingent consideration

 

25,936

 

(8,985)

Income from equity method investments

 

(283)

 

(95)

Distributions received from equity method investments

 

176

 

425

Deferred taxes and other non-cash items

 

436

 

6,424

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

 

 

  

Accounts receivable

 

(7,393)

 

(10,478)

Prepaid expenses and other assets

 

(5,098)

 

(12,827)

Accounts payable

 

(1,637)

 

3,081

Accrued expenses

 

2,169

 

4,721

Due to affiliates

 

(39,818)

 

(76,997)

Contingent consideration and other liabilities

 

(3,023)

 

(22,520)

Deferred revenue

 

383

 

1,810

Net cash provided by (used in) operating activities

 

34,128

 

(4,642)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

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

 

(7,925)

 

(2,603)

Purchase of fixed assets

 

(2,835)

 

(3,232)

Investment and other, net

 

(17,500)

 

(5,232)

Net cash used in investing activities

 

(28,260)

 

(11,067)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Borrowings under credit facilities

 

524,375

 

50,000

Repayments of borrowings under credit facilities

 

(409,173)

 

(6,174)

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)

(3,856)

Contingent consideration paid

 

(4,172)

 

(10,443)

Payments of debt financing costs

 

(2,700)

 

Proceeds from exercise of stock options

2,863

422

Payments on finance lease obligations

(33)

Distributions for unitholders

 

(9,055)

 

(8,209)

Net cash provided by financing activities

 

97,993

 

21,740

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

(4)

 

319

CHANGE IN CASH AND CASH EQUIVALENTS

 

103,857

 

6,350

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

65,858

 

310,684

End of period

$

169,715

$

317,034

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 March 31, 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

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 on interest rate swaps designated as 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

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

29,102

29,102

9,980

39,082

Issuance of units in connection with an acquisition and contingent consideration

187,795

2

2

2

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

25,000

(25,000)

1,107

1,107

1,107

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

23,747

23,747

(20,494)

3,253

Non-cash equity compensation expenses

1,992

1,992

1,992

Currency translation adjustment-net of tax

2,915

2,915

835

3,750

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

14,525

14,525

4,241

18,766

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

(3,251)

(3,251)

(3,251)

Balance at March 31, 2022

65,362,389

$

653

11,601,814

$

116

$

865,857

$

54,097

$

20,469

$

941,192

$

241,426

$

1,182,618

See notes to unaudited condensed consolidated financial statements

6

Table of Contents

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 months ended March 31, 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.

7

Table of Contents

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, 

    

2021

    

2022

Domestic revenue

$

370,954

$

507,311

International revenue

 

23,221

 

29,256

Total revenue

$

394,175

$

536,567

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 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 March 31, 2021 and 2022:

    

2021

2022

Focus LLC common units

    

17,019,104

11,601,814

Focus LLC restricted common units

71,374

193,625

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

7,006,625

6,998,055

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

24,097,103

18,793,494

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

79,211,945

84,155,883

Non-controlling interest allocation

30.4

%

22.3

%

Company’s interest in Focus LLC

69.6

%

77.7

%

(1)Focus LLC common units issuable upon conversion of 16,728,882 and 16,202,274 (see Note 9) vested and unvested Focus LLC incentive units outstanding as of March 31, 2021 and 2022, 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.

8

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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)

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

    

March 31, 

2021

    

2022

Net income attributable to common shareholders

$

256

$

29,102

Weighted average shares of Class A common stock outstanding

 

52,200,029

 

65,331,370

Basic income per share

$

0.00

$

0.45

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

Three Months Ended

March 31, 

    

2021

    

2022

Net income attributable to common shareholders

$

256

$

29,102

Weighted average shares of Class A common stock outstanding

 

52,200,029

 

65,331,370

Effect of dilutive stock options

415,041

407,059

Effect of dilutive restricted stock units

39,752

29,034

Total

 

52,654,822

 

65,767,463

Diluted income per share

$

0.00

$

0.44

Diluted income per share for the three months ended March 31, 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 March 31, 2021 and 2022.

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 months ended March 31, 2021 and 2022, such exchange is not reflected in diluted net income per share as the assumed exchange is not dilutive.

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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)

4. ACQUISITIONS

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 three months ended March 31, 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 three months ended March 31, 2022 are as follows:

    

Number of years

Customer relationships

5

Other acquired intangibles

5

Weighted-average useful life of all intangibles acquired

5

From April 1, 2022 to May 5, 2022, the Company completed four business acquisitions for cash, including cash due subsequent to closing, and equity, inclusive of the issuance of 512,290 shares of Class B common stock, of $263,188, 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 three months ended March 31, 2022:

    

December 31, 

    

March 31, 

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

Other

 

(7,439)

2,820

 

669,756

2,820

Balance end of period:

Goodwill

 

1,947,939

1,950,759

Cumulative impairment losses

 

(22,624)

(22,624)

$

1,925,315

$

1,928,135

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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 summarizes the amortizing acquired intangible assets at December 31, 2021:

Gross Carry

Accumulated

Net Book

    

Amount

    

Amortization

    

Value

Customer relationships

$

2,228,461

$

(787,016)

$

1,441,445

Management contracts

 

191,578

 

(57,153)

 

134,425

Other acquired intangibles

 

10,911

 

(5,062)

 

5,849

Total

$

2,430,950

$

(849,231)

$

1,581,719

The following table summarizes the amortizing acquired intangible assets at March 31, 2022:

    

Gross Carry

    

Accumulated

    

Net Book

Amount

Amortization

Value

Customer relationships

$

2,232,141

$

(844,289)

$

1,387,852

Management contracts

 

191,665

(60,000)

131,665

Other acquired intangibles

 

10,988

(5,503)

5,485

Total

$

2,434,794

$

(909,792)

$

1,525,002

6. FAIR VALUE MEASUREMENTS

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

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

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

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

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

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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)

Marketable securities

At March 31, 2022, the fair value of the Company’s investment in a mutual fund was $16,724. 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, 2021 and March 31, 2022 are as follows:

December 31, 2021

March 31, 2022

    

Stated

    

Fair

    

Stated

    

Fair

Value

Value

Value

Value

First Lien Term Loan - Tranche A

$

1,610,928

$

1,598,846

$

1,606,755

$

1,580,645

First Lien Term Loan - Tranche B

 

796,374

 

792,392

 

794,373

 

783,450

Derivatives

At December 31, 2021 and March 31, 2022, the fair value of the Company’s $850,000 notional amount interest rate swap agreements was $5,810 and $29,593, respectively, which is included in prepaid expenses and other assets in the accompanying unaudited condensed consolidated balance sheets. The fair value was based on Level 2 inputs which included the relevant interest rate forward curves.

Business acquisitions

For business acquisitions, the Company recognizes the fair value of goodwill and other acquired intangible assets, and estimated contingent consideration at the acquisition date as part of purchase price. This fair value measurement is based on unobservable (Level 3) inputs.

The following table represents changes in the fair value of estimated contingent consideration for business acquisitions for the year ended December 31, 2021 and the three months ended March 31, 2022:

Balance at January 1, 2021

    

$

169,670

Additions to estimated contingent consideration

212,074

Payments of contingent consideration

(143,107)

Non-cash changes in fair value of estimated contingent consideration

112,416

Other

(1,026)

Balance at December 31, 2021

$

350,027

Additions to estimated contingent consideration

Payments of contingent consideration

(43,190)

Non-cash changes in fair value of estimated contingent consideration

(8,985)

Other

735

Balance at March 31, 2022

$

298,587

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

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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)

At December 31, 2021 and March 31, 2022, amounts due to sellers in connection with business acquisitions of $114,156 and $113,987, respectively, are included in contingent consideration and other liabilities in the unaudited condensed consolidated balance sheets.

During the year ended December 31, 2021, the Company paid $131,827 in cash and issued $11,280 in Focus LLC common units as contingent consideration associated with business acquisitions. During the three months ended March 31, 2022, the Company paid $33,492 in cash and issued $9,698 in Focus LLC common units as contingent consideration associated with business acquisitions.

During the three months ended March 31, 2021 and 2022, the Company paid cash of $591 and $728, respectively, as contingent consideration 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, 2021 and March 31, 2022 are summarized below:

Quantitative Information About Level 3

 

Fair Value Measurements

 

Fair Value at

    

Valuation

    

Unobservable

    

 

December 31, 2021

Techniques

Inputs

Ranges

 

$

350,027

Monte Carlo Simulation Model

Forecasted growth rates

0.7% - 20.1

%