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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 September 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 November 1, 2022, the registrant had 65,865,932 shares of Class A common stock and 11,653,693 shares of Class B common stock outstanding.

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 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 (loss)

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

47

Item 4.

Controls and Procedures

47

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 6.

Exhibits

49

SIGNATURES

50

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, 

    

September 30, 

2021

2022

ASSETS

 

  

 

  

Cash and cash equivalents

$

310,684

$

128,528

Accounts receivable less allowances of $3,255 at 2021 and $3,949 at 2022

 

198,827

 

207,992

Prepaid expenses and other assets

 

123,826

 

174,007

Fixed assets—net

 

47,199

 

49,818

Operating lease assets

249,850

257,749

Debt financing costs—net

 

4,254

 

3,648

Deferred tax assets—net

267,332

232,332

Goodwill

 

1,925,315

 

2,092,787

Other intangible assets—net

 

1,581,719

 

1,637,816

TOTAL ASSETS

$

4,709,006

$

4,784,677

LIABILITIES AND EQUITY

 

  

LIABILITIES

 

  

Accounts payable

$

11,580

$

11,822

Accrued expenses

 

72,572

 

108,542

Due to affiliates

 

105,722

 

66,868

Deferred revenue

 

10,932

 

15,554

Contingent consideration and other liabilities

 

468,284

 

320,176

Deferred tax liabilities

31,973

39,477

Operating lease liabilities

277,324

286,930

Borrowings under credit facilities (stated value of $2,407,302 and $2,438,779 at December 31, 2021 and September 30, 2022, respectively)

 

2,393,669

 

2,427,211

Tax receivable agreements obligations

219,542

221,237

TOTAL LIABILITIES

 

3,591,598

 

3,497,817

COMMITMENTS AND CONTINGENCIES (Note 12)

 

  

EQUITY

Class A common stock, par value $0.01, 500,000,000 shares authorized; 65,320,124 and 65,865,932 shares issued and outstanding at December 31, 2021 and September 30, 2022, respectively

653

658

Class B common stock, par value $0.01, 500,000,000 shares authorized; 11,439,019 and 11,653,693 shares issued and outstanding at December 31, 2021 and September 30, 2022, respectively

114

116

Additional paid-in capital

841,753

930,042

Retained earnings

24,995

116,429

Accumulated other comprehensive income

3,029

11,378

Total shareholders' equity

870,544

1,058,623

Non-controlling interest

246,864

228,237

Total equity

1,117,408

1,286,860

TOTAL LIABILITIES AND EQUITY

$

4,709,006

$

4,784,677

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 nine months ended

September 30, 

September 30, 

    

2021

    

2022

    

2021

    

2022

REVENUES:

  

  

  

  

Wealth management fees

$

433,967

$

499,017

$

1,213,782

$

1,531,617

Other

 

20,568

 

20,847

 

60,283

 

64,025

 

Total revenues

 

454,535

 

519,864

 

1,274,065

 

1,595,642

 

OPERATING EXPENSES:

 

 

 

 

 

Compensation and related expenses

 

144,249

 

186,320

 

424,337

 

546,251

 

Management fees

 

127,166

 

122,971

 

345,443

 

397,612

 

Selling, general and administrative

 

75,637

 

89,915

 

208,481

 

273,336

 

Intangible amortization

 

46,055

 

67,331

 

133,041

 

192,256

 

Non-cash changes in fair value of estimated contingent consideration

 

36,243

 

(30,708)

 

96,241

 

(82,450)

 

Depreciation and other amortization

 

3,622

 

4,016

 

10,835

 

11,454

 

Total operating expenses

 

432,972

 

439,845

 

1,218,378

 

1,338,459

 

INCOME FROM OPERATIONS

 

21,563

 

80,019

 

55,687

 

257,183

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

Interest income

 

206

 

126

 

310

 

146

 

Interest expense

 

(16,543)

 

(26,491)

 

(37,893)

 

(63,999)

 

Amortization of debt financing costs

 

(1,102)

 

(949)

 

(2,856)

 

(2,999)

 

Other income (expense)—net

 

312

 

(2,347)

 

(219)

 

(3,834)

 

Income from equity method investments

91

51

514

157

Total other expense—net

 

(17,036)

 

(29,610)

 

(40,144)

 

(70,529)

 

INCOME BEFORE INCOME TAX

 

4,527

50,409

 

15,543

 

186,654

 

INCOME TAX EXPENSE

 

2,678

12,120

 

6,038

 

59,965

 

NET INCOME

1,849

38,289

9,505

126,689

Non-controlling interest

(1,200)

(9,040)

(6,623)

(35,255)

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS

$

649

$

29,249

$

2,882

$

91,434

Income per share of Class A common stock:

Basic

$

0.01

$

0.45

$

0.05

$

1.40

Diluted

$

0.01

$

0.44

$

0.05

$

1.39

Weighted average shares of Class A common stock outstanding:

Basic

59,940,166

65,599,493

55,978,639

65,441,151

Diluted

60,438,510

65,821,228

56,447,070

65,729,339

See notes to unaudited condensed consolidated financial statements

3

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of comprehensive income (loss)

(In thousands)

For the three months ended

For the nine months ended

 

September 30, 

September 30, 

    

2021

    

2022

    

2021

    

2022

 

Net income

$

1,849

$

38,289

$

9,505

$

126,689

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

(5,057)

 

(13,237)

 

(5,876)

 

(20,662)

Unrealized gain on interest rate swaps designated as cash flow hedges

432

7,710

5,937

31,811

Comprehensive income (loss)

(2,776)

32,762

9,566

137,838

Less: Comprehensive (income) loss attributable to non-controlling interest

14

(7,994)

(7,194)

(38,055)

Comprehensive income (loss) attributable to common shareholders

$

(2,762)

$

24,768

$

2,372

$

99,783

See notes to unaudited condensed consolidated financial statements

4

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)

For the nine months ended

September 30, 

    

2021

    

2022

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

9,505

$

126,689

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

 

 

  

Intangible amortization

 

133,041

 

192,256

Depreciation and other amortization

 

10,835

 

11,454

Amortization of debt financing costs

 

2,856

 

2,999

Non-cash equity compensation expense

 

24,569

 

22,190

Non-cash changes in fair value of estimated contingent consideration

 

96,241

 

(82,450)

Income from equity method investments

 

(514)

 

(157)

Distributions received from equity method investments

 

773

 

1,059

Deferred taxes and other non-cash items

 

(570)

 

38,492

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

 

 

  

Accounts receivable

 

(22,247)

 

(7,959)

Prepaid expenses and other assets

 

(17,731)

 

(7,083)

Accounts payable

 

1,974

 

21

Accrued expenses

 

35,382

 

37,729

Due to affiliates

 

22,715

 

(39,020)

Contingent consideration and other liabilities

 

(61,181)

 

(69,038)

Deferred revenue

 

2,200

 

3,134

Net cash provided by operating activities

 

237,848

 

230,316

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

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

 

(286,803)

 

(361,675)

Purchase of fixed assets

 

(6,560)

 

(13,152)

Investment and other, net

 

(17,232)

 

(5,232)

Net cash used in investing activities

 

(310,595)

 

(380,059)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Borrowings under credit facilities

 

1,169,500

 

100,000

Repayments of borrowings under credit facilities

 

(419,145)

 

(68,523)

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

 

(67,735)

 

(35,929)

Payments of deferred acquisition consideration

(1,484)

Payments of debt financing costs

 

(8,282)

 

(1,111)

Proceeds from exercise of stock options

6,186

1,158

Distributions for unitholders

(26,391)

(20,519)

Other

(46)

375

Net cash provided by (used in) financing activities

 

649,664

 

(29,889)

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

 

(568)

 

(2,524)

CHANGE IN CASH AND CASH EQUIVALENTS

 

576,349

 

(182,156)

CASH AND CASH EQUIVALENTS:

 

  

 

  

Beginning of period

 

65,858

 

310,684

End of period

$

642,207

$

128,528

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 September 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 (Loss)

    

Equity

    

Interest

    

Total  Equity

Balance at July 1, 2021

59,792,889

$

598

12,692,740

$

127

$

650,421

$

16,816

$

734

$

668,696

$

230,389

$

899,085

Net income

649

649

1,200

1,849

Issuance of units in connection with an acquisition and contingent consideration

64,706

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

418,669

4

(418,669)

(4)

21,901

21,901

21,901

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

34,898

1,825

1,825

1,825

Exercise of stock options

68,885

1

2,168

2,169

2,169

Change in non-controlling interest allocation

(18,833)

(18,833)

(4,129)

(22,962)

Non-cash equity compensation expenses

1,569

1,569

1,569

Currency translation adjustment-net of tax

(3,735)

(3,735)

(1,322)

(5,057)

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

324

324

108

432

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

490

490

490

Balance at September 30, 2021

60,315,341

$

603

12,338,777

$

123

$

659,541

$

17,465

$

(2,677)

$

675,055

$

226,246

$

901,301

Balance at July 1, 2022

65,442,389

654

12,034,104

120

910,222

87,180

15,859

$

1,014,035

$

234,821

$

1,248,856

Net income

29,249

29,249

9,040

38,289

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

381,573

4

(381,573)

(4)

15,469

15,469

15,469

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

15,158

615

615

615

Exercise of stock options

26,767

736

736

736

Restricted stock units vesting and related withholding

45

Restricted common units vesting

1,162

Change in non-controlling interest allocation

1,009

1,009

(14,578)

(13,569)

Non-cash equity compensation expenses

2,226

2,226

2,226

Currency translation adjustment-net of tax

(10,666)

(10,666)

(2,571)

(13,237)

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

6,185

6,185

1,525

7,710

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

(235)

(235)

(235)

Balance at September 30, 2022

65,865,932

$

658

11,653,693

$

116

$

930,042

$

116,429

$

11,378

$

1,058,623

$

228,237

$

1,286,860

See notes to unaudited condensed consolidated financial statements

6

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Nine months ended September 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 (Loss)

    

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

2,882

2,882

6,623

9,505

Issuance of units in connection with an acquisition and contingent consideration

233,098

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

2,249,615

22

(2,249,615)

(22)

109,677

109,677

109,677

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

169,530

2

8,348

8,350

8,350

Exercise of stock options

169,386

2

5,343

5,345

5,345

Change in non-controlling interest allocation

(328,318)

(328,318)

(100,028)

(428,346)

Non-cash equity compensation expenses

3,859

3,859

3,859

Currency translation adjustment-net of tax