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 | (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 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
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 and 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 and 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
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
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
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:
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:
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.
9
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 | |||
10
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:
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.
11
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:
Estimated contingent consideration is included in contingent consideration and other liabilities in the accompanying unaudited condensed consolidated balance sheets.
12
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 |
|
| ||
March 31, 2022 | Techniques | Inputs | Ranges |
| ||||
$ | 298,587 | Monte Carlo Simulation Model | Forecasted growth rates | (9.1)% - 32.1 | % | |||
Discount rates | 10.0% - 17.0 | % | ||||||
7. CREDIT FACILITY
As of March 31, 2022, Focus LLC’s credit facility (the “Credit Facility”) consisted of a $2,401,128 first lien term loan (the “First Lien Term Loan”), consisting of a tranche A (“Tranche A”) and tranche B (“Tranche B”), and a $650,000 first lien revolving credit facility (the “First Lien Revolver”).
13
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
Tranche A bears interest (at Focus LLC’s option) at: (i) LIBOR plus a margin of 2.00% or (ii) the lender’s Base Rate (as defined in the Credit Facility) plus a margin of 1.00%. Tranche A requires quarterly installment repayments of $4,173 and has a maturity date of July 2024.
Tranche B bears interest (at Focus LLC’s option) at: (i) LIBOR plus a margin of 2.50% with a 0.50% LIBOR floor or (ii) the lender’s Base Rate plus a margin of 1.50%. Tranche B requires quarterly installment repayments of $2,001 and has a maturity date of June 2028.
In April 2022, Focus LLC amended the First Lien Revolver to extend the maturity date to June 2024 and change the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”). As amended, the First Lien Revolver bears interest (at Focus LLC’s option) at SOFR, including a credit adjustment spread, plus a margin of 2.00% with step downs to 1.75%, 1.50% and 1.25% or the lender’s Base Rate plus a margin of 1.00% with step downs to 0.75%, 0.50% and 0.25%, based on achievement of a specified First Lien Leverage Ratio. The First Lien Revolver unused commitment fee is 0.50% with step downs to 0.375% and 0.25% based on achievement of a specified First Lien Leverage Ratio. Up to $30,000 of the First Lien Revolver is available for the issuance of letters of credit, subject to certain limitations. In connection with the amendment, Focus LLC incurred $975 in estimated debt financing costs.
Focus LLC’s obligations under the Credit Facility are collateralized by the majority of Focus LLC’s assets. The Credit Facility contains various customary covenants, including, but not limited to: (i) incurring additional indebtedness or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other restricted payments.
Focus LLC is required to maintain a First Lien Leverage Ratio (as defined in the Credit Facility) of not more than 6.25:1.00 as of the last day of each fiscal quarter. At March 31, 2022, Focus LLC’s First Lien Leverage Ratio was 3.84:1.00, which satisfied the maximum ratio of 6.25:1.00. First Lien Leverage Ratio means the ratio of amounts outstanding under the First Lien Term Loan and First Lien Revolver plus other outstanding debt obligations secured by a lien on the assets of Focus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted cash and cash equivalents to Consolidated EBITDA (as defined in the Credit Facility). Consolidated EBITDA for purposes of the Credit Facility was $556,172 at March 31, 2022. Focus LLC is also subject on an annual basis to contingent principal payments based on an excess cash flow calculation (as defined in the Credit Facility) for any fiscal year if the First Lien Leverage Ratio exceeds 3.75:1.00. No contingent principal payments were required to be made in 2021. Based on the excess cash flow calculation for the year ended December 31, 2021, no contingent principal payments are required to be made in 2022.
The Company defers and amortizes its debt financing costs over the respective terms and tranches of the First Lien Term Loan and First Lien Revolver. The debt financing costs related to the First Lien Term Loan are recorded as a reduction of the carrying amount of the First Lien Term Loan in the unaudited condensed consolidated balance sheets. The debt financing costs related to the First Lien Revolver are recorded in debt financing costs-net in the unaudited condensed consolidated balance sheets.
14
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The following is a reconciliation of principal amounts outstanding under the Credit Facility to borrowings under the Credit Facility recorded in the unaudited condensed consolidated balance sheets at December 31, 2021 and March 31, 2022:
At December 31, 2021 and March 31, 2022, unamortized debt financing costs associated with the First Lien Revolver of $4,254 and $3,580, respectively, were recorded in debt financing costs-net in the unaudited condensed consolidated balance sheets.
Weighted-average interest rates for outstanding borrowings were approximately 3% for the year ended December 31, 2021 and the three months ended March 31, 2022.
As of December 31, 2021 and March 31, 2022, the First Lien Revolver available unused commitment line was $642,085 and $590,249, respectively.
As of December 31, 2021 and March 31, 2022, Focus LLC was contingently obligated for letters of credit in the amount of $7,915 and $9,751, respectively, each bearing interest at an annual rate of approximately 2%.
8. DERIVATIVES
At March 31, 2022, the Company has (i) a 4 year floating to fixed interest rate swap with a notional amount of $400,000 that was entered into in March 2020, the terms of which provide that the Company pays interest to the counterparty each month at a rate of 0.713% and receives interest from the counterparty each month at the 1 month USD LIBOR rate, subject to a 0% floor and (ii) two 4 year floating to fixed interest rate swap agreements with notional amounts of $250,000 and $200,000, that were entered into in April 2020, the terms of which provide that the Company pays interest to the counterparties each month at a rate of 0.537% and 0.5315%, respectively, and receives interest from the counterparties each month at the 1 month USD LIBOR rate, subject to a 0% floor. The interest rate swaps effectively fix the variable interest rate applicable to $850,000 of borrowings outstanding on the First Lien Term Loan. The Company designated these swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on these portions of its First Lien Term Loan borrowings.
At December 31, 2021 and March 31, 2022, the fair value of the interest rate swaps 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 interest rate swaps continue to be effective hedges, and as such, the offsetting adjustment to the fair value is recorded in accumulated other comprehensive income, net of tax of $1,194 and $6,211 at December 31, 2021 and March 31, 2022, respectively.
15
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
9. EQUITY
Exchange rights
Each Focus LLC common unit, together with a corresponding share of Focus Inc.’s Class B common stock, and Focus LLC incentive unit (after conversion into a number of Focus LLC common units taking into account the then-current value of the common units and such incentive unit’s aggregate hurdle amount) is exchangeable, pursuant to the terms and subject to the conditions set forth in the Operating Agreement, for one share of Focus Inc.’s Class A common stock, or, if either Focus Inc. or Focus LLC so elects, cash.
In March 2022, the Company issued an aggregate of 26,956 shares of Class A common stock and retired 25,000 shares of Class B common stock and 4,250 incentive units in Focus LLC, and acquired 26,956 common units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
Other
In February 2022, Focus LLC issued 187,795 common units and Focus Inc. issued a corresponding number of shares of Class B common stock in connection with a contingent consideration payment.
Stock Options and Restricted Stock Units
The following table provides information relating to the changes in the Company’s stock options during the three months ended March 31, 2022:
|
| Weighted | |||
Average | |||||
Stock | Exercise | ||||
Options | Price | ||||
Outstanding—January 1, 2022 |
| 1,931,868 | $ | 37.47 | |
Granted | 350,048 | 51.73 | |||
Exercised | (15,309) | 27.60 | |||
Forfeited | (36,079) | 55.71 | |||
Outstanding—March 31, 2022 | 2,230,528 | 39.48 | |||
Vested—March 31, 2022 | 839,770 | 31.61 | |||
The Company uses the Black-Scholes option-pricing model to determine the fair value of time-based stock options. The determination of the fair value using the Black-Scholes option-pricing model is affected by the price of Focus Inc.’s Class A common stock, as well as by assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected unit price volatility over the term of the stock option, expected term, risk-free interest rates and expected dividend yield.
The estimated grant-date fair value of the time-based stock option grants during the three months ended March 31, 2022 were calculated based on the following weighted-average assumptions:
16
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 provides information relating to the changes in the Company’s restricted stock units during the three months ended March 31, 2022:
Weighted | |||||
Restricted | Average | ||||
Stock | Grant Date | ||||
| Units |
| Fair Value | ||
Outstanding—January 1, 2022 |
| 187,756 | $ | 47.69 | |
Granted | — | — | |||
Forfeited | (11,668) | 47.15 | |||
Vested | — | — | |||
Outstanding—March 31, 2022 | 176,088 | 47.72 | |||
In connection with the IPO, the Company granted market-based stock options to purchase an aggregate of 155,000 shares of Class A common stock that would have vested on the fifth anniversary of the IPO if the 90-day VWAP within such five year period immediately following the IPO reaches at least $100. In March 2022, these stock options were modified whereby the stock options will vest in July 2024, the sixth anniversary of the pricing of the Company’s IPO, with vesting based on the highest 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. The vested stock options can only be exercised in accordance with the following schedule: (i) a total of 25% of the vested stock options may be exercised on and following the date of vesting, (ii) an additional 25% (for a total of 50%) of the vested stock options may be exercised on and following the first anniversary of the date of vesting in July 2025, and (iii) an additional 50% (for a total of 100%) of the vested stock options may be exercised on and following the second anniversary of the date of vesting in July 2026. In connection with the modification, the Company will recognize incremental non-cash equity compensation expense of $518 from the modification date through July 2026.
The Company recognized $1,164 and $1,992 of non-cash equity compensation expense in relation to the stock options and restricted stock units during the three months ended March 31, 2021 and 2022, respectively.
Focus LLC Restricted Common Units and Focus LLC Incentive Units
The following table provides information relating to the changes in Focus LLC restricted common units during the three months ended March 31, 2022:
|
| Weighted | |||
Restricted | Average | ||||
Common | Grant Date | ||||
Units | Fair Value | ||||
Outstanding—January 1, 2022 |
| 193,625 | $ | 54.70 | |
Granted |
| — | — | ||
Forfeited |
| — | — | ||
Vested | — | — | |||
Outstanding—March 31, 2022 |
| 193,625 |
| 54.70 | |
17
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 provides information relating to the changes in Focus LLC incentive units during the three months ended March 31, 2022:
|
| Weighted | |||
Average | |||||
Incentive | Hurdle | ||||
Units | Price | ||||
Outstanding—January 1, 2022 |
| 16,146,524 | $ | 26.44 | |
Granted |
| 60,000 | 43.07 | ||
Exchanged | (4,250) | 27.00 | |||
Forfeited |
| — | — | ||
Outstanding—March 31, 2022 |
| 16,202,274 |
| 26.51 | |
Vested—March 31, 2022 |
| 9,817,878 |
| 20.47 | |
The Company uses the Black-Scholes option-pricing model to determine the fair value of time-based incentive units. The determination of the fair value using the Black-Scholes option-pricing model is affected by the Company’s estimated common unit price, as well as by assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected unit price volatility over the term of the incentive unit, expected term, risk-free interest rates and expected dividend yield.
The estimated grant-date fair value of the time-based incentive unit grants during the three months ended March 31, 2022 was calculated based on the following weighted-average assumptions:
Expected term | 5.0 | years | |
Expected stock price volatility | 34 | % | |
Risk-free interest rate | 1.71 | % | |
Expected dividend yield | — | % | |
Weighted average grant date fair value | $ | 14.16 |
18
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
Incentive units outstanding and vested at March 31, 2022 were as follows:
| Number |
| Vested | |
Hurdle Rates | Outstanding | Units | ||
$1.42 |
| 421 | 421 | |
5.50 |
| 798 | 798 | |
6.00 |
| 386 | 386 | |
7.00 |
| 1,081 | 1,081 | |
9.00 |
| 708,107 | 708,107 | |
11.00 |
| 813,001 | 813,001 | |
12.00 |
| 513,043 | 513,043 | |
13.00 |
| 540,000 | 540,000 | |
14.00 |
| 10,098 | 10,098 | |
16.00 |
| 45,191 | 45,191 | |
17.00 |
| 20,000 | 20,000 | |
19.00 |
| 527,928 | 527,928 | |
21.00 |
| 3,045,236 | 3,045,236 | |
22.00 |
| 821,417 | 821,417 | |
23.00 |
| 524,828 | 524,828 | |
26.26 | 12,500 | — | ||
27.00 |
| 12,484 | 12,484 | |
27.90 | 1,929,424 | 931,758 | ||
28.50 | 1,440,230 | 1,051,459 | ||
30.48 | 30,000 | 10,000 | ||
33.00 |
| 3,617,500 | 7,500 | |
36.64 | 30,000 | 20,000 | ||
43.07 | 60,000 | — | ||
43.50 | 30,000 | 10,000 | ||
44.71 | 806,324 | 203,142 | ||
58.50 | 662,277 | — | ||
16,202,274 | 9,817,878 |
In connection with the IPO, Focus LLC granted 3,845,000 market-based incentive units with a hurdle rate of $33.00 that would have vested on the fifth anniversary of the IPO if the 90-day VWAP within such five year period immediately following the IPO reaches at least $100. In March 2022, these incentive units were modified whereby the incentive units will vest in July 2024, the sixth anniversary of the pricing of the Company’s IPO, with vesting based on the highest 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. The vested incentive units can only be exchanged for Class A common stock in accordance with the following schedule: (i) a total of 25% of the vested incentive units may be exchanged on and following the date of vesting, (ii) an additional 25% (for a total of 50%) of the vested incentive units may be exchanged on and following the first anniversary of the date of vesting in July 2025, and (iii) an additional 50% (for a total of 100%) of the vested incentive units may be exchanged on and following the second anniversary of the date of vesting in July 2026. In connection with the modification, the Company will recognize incremental non-cash equity compensation expense of $10,144 from the modification date through July 2024, the sixth anniversary of the IPO.
The Company recorded $11,192 and $4,715 of non-cash equity compensation expense for incentive units and restricted common units during the three months ended March 31, 2021 and 2022, respectively.
19
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
10. INCOME TAXES
The estimated annual effective tax rate for the three months ended March 31, 2022 was 28.6% as compared to 45.1% for the year ended December 31, 2021. Income tax expense for the three months ended March 31, 2022 is primarily related to federal, state and local income taxes imposed on the Company’s allocable portion of taxable income from Focus LLC. The allocable portion of taxable income primarily differs from the net income attributable to the Company due to permanent differences such as non-deductible equity-based compensation expense of Focus LLC.
During the three months ended March 31, 2022, there were no changes to the Company’s uncertain tax positions.
11. TAX RECEIVABLE AGREEMENTS
In connection with the IPO and the reorganization transactions that occurred in connection with the IPO, Focus Inc. entered into two tax receivable agreements: one with certain entities affiliated with the private equity investors of Focus LLC and the other with certain other continuing and former owners of Focus LLC. In March 2020, Focus Inc. entered into an additional tax receivable agreement (the three agreements, collectively, the “Tax Receivable Agreements”) for tax receivable agreement holders that join Focus LLC as members after the closing of the IPO (the parties to the Tax Receivable Agreements, collectively, the “TRA Holders”). New Focus LLC owners in the future may also become party to this additional Tax Receivable Agreement. The Tax Receivable Agreements generally provide for the payment by Focus Inc. to each TRA holder of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that Focus Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain circumstances in connection with the reorganization transactions that occurred in connection with the IPO and in periods after the IPO or after entering into the Tax Receivable Agreements, as applicable, as a result of certain increases in tax bases and certain tax benefits attributable to imputed interest. Focus Inc. will retain the benefit of the remaining 15% of these cash savings.
As of March 31, 2022, the Company had recorded a liability of $215,999 relating to the TRA obligations. Future payments under the Tax Receivable Agreements in respect of future exchanges of Focus LLC units for shares of Class A common stock will be in addition to the amount recorded. During the three months ended March 31, 2022, payments totaling $3,856 were made under the Tax Receivable Agreements.
12. COMMITMENTS AND CONTINGENCIES
Credit Risk—The Company’s broker-dealer subsidiaries clear all transactions through clearing brokers on a fully disclosed basis. Pursuant to the terms of the agreements between the Company’s broker-dealer subsidiaries and their clearing brokers, the clearing brokers have the right to charge the Company’s broker-dealer subsidiaries for losses that result from a counterparty’s failure to fulfill its contractual obligations. This right applies to all trades executed through its clearing brokers, and therefore, the Company believes there is no maximum amount assignable to the right of the clearing brokers. Accordingly, at December 31, 2021 and March 31, 2022, the Company had recorded no liabilities in connection with this right.
In addition, the Company has the right to pursue collection or performance from the counterparties who do not perform under their contractual obligations. The Company monitors the credit standing of the clearing brokers and counterparties with which they conduct business.
The Company is exposed to credit risk for accounts receivable from clients. Such credit risk is limited to the amount of accounts receivable. The Company is also exposed to credit risk for changes in the benchmark interest rate (LIBOR, SOFR or Base Rate) in connection with its Credit Facility.
20
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
The counterparties to the Company’s derivative financial instruments are major international financial institutions. The Company is exposed to credit risk for the net exchanges under these agreements, but not for the notional amounts. The Company does not anticipate non-performance by any of its counterparties.
The Company maintains its cash in bank depository accounts, which, at times, may exceed federally insured limits. The Company selects depository institutions based, in part, upon management’s review of the financial stability of the institution. At December 31, 2021 and March 31, 2022, a significant portion of cash and cash equivalents were held at a single institution.
Contingent Consideration Arrangements—Contingent consideration is payable in the form of cash and, in some cases, equity. Since the contingent consideration to be paid is based on the growth of forecasted financial performance levels over a number of years, the Company cannot calculate the maximum contingent consideration that may be payable under these arrangements.
Legal and Regulatory Matters— In the ordinary course of business, the Company and its subsidiaries are involved in lawsuits, regulatory matters and other claims. The Company has insurance to cover certain losses that arise in such matters; however, this insurance may not be sufficient to cover these losses. One of the Company’s subsidiaries has settled most of the investor demands related to a private fund (that held approximately $27 million in client assets) during the year ended December 31, 2021. The Company has notified its insurance carriers of the matter. Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if any, arising out of any existing legal matters will have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
From time to time, the Company and its subsidiaries receive requests for information from governmental authorities regarding business activities. The Company has cooperated and plans to continue to cooperate with all governmental authorities. The Company continues to believe that the resolution of any governmental inquiry will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Indemnifications—In the ordinary course of business, the Company enters into contracts pursuant to which it may agree to indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.
Management believes that the likelihood of any material liability arising under these indemnification provisions is remote. Management cannot estimate any potential maximum exposure due to both the remoteness of any potential claims and the fact that items that would be included within any such calculated claim would be beyond the control of the Company. Consequently, no liability has been recorded in the unaudited condensed consolidated balance sheets.
13. CASH FLOW INFORMATION
Three Months Ended | ||||||
March 31, | ||||||
| 2021 |
| 2022 | |||
Supplemental disclosures of cash flow information—cash paid for: | ||||||
Interest | $ | 10,267 | $ | 16,506 | ||
Income taxes | $ | 3,739 | $ | 10,066 | ||
Supplemental non-cash cash flow information: |
|
|
|
| ||
Fair market value of estimated contingent consideration in connection with acquisitions | $ | 6,187 | $ | — | ||
21
FOCUS FINANCIAL PARTNERS INC.
Notes to unaudited condensed consolidated financial statements (continued)
(In thousands, except unit data, share and per share amounts)
14. RELATED PARTIES
The Company’s Chief Executive Officer, through an entity owned and controlled by him, owns a personal aircraft that was acquired without Company resources that he uses for business travel. The Company reimburses the Company’s Chief Executive Officer for certain costs and third party payments associated with the use of his personal aircraft for Company-related business travel. The Company also pays pilot fees for such business travel flights. During the three months ended March 31, 2021 and 2022, the Company recognized expenses of $603 and $1,095, respectively, related to these reimbursements. Given the geography of the Company’s partner firms and prospects, the Company believes that the use of private aircraft creates efficiencies to enhance the productivity of the Company’s Chief Executive Officer and certain other authorized personnel.
At March 31, 2022, affiliates of certain holders of the Company’s Class A common stock and Class B common stock were lenders under the Credit Facility.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the context requires, all references to “we,” “us,” “our,” the “Company,” “Focus Inc.” refer to Focus Financial Partners Inc. and its consolidated subsidiaries. “Focus LLC” refers to Focus Financial Partners, LLC, a Delaware limited liability company and our consolidated subsidiary.
The term “partner firms” refers to our consolidated subsidiaries engaged in wealth management and related services, the businesses of which are typically managed by the principals. The term “principals” refers to the wealth management professionals who manage the businesses of our partner firms pursuant to the relevant management agreement. The term “our partnership” refers to our business and relationship with our partner firms and is not intended to describe a particular form of legal entity or a legal relationship.
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021 and 2022.
Forward-Looking Statements
Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements give our current expectations, contain projections of results of operations or of financial condition, or forecasts of future events. Words such as “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” “continue,” “will” and similar expressions are used to identify forward-looking statements. They can be affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward-looking statements can be guaranteed. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on February 17, 2022, and in our other filings with the SEC. Actual results may vary materially. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
| ● | fluctuations in wealth management fees; |
| ● | our reliance on our partner firms and the principals who manage their businesses; |
| ● | our ability to make successful acquisitions; |
| ● | unknown liabilities of or poor performance by acquired businesses; |
| ● | harm to our reputation; |
| ● | our inability to facilitate smooth succession planning at our partner firms; |
| ● | our inability to compete; |
| ● | our reliance on key personnel and principals; |
| ● | our inability to attract, develop and retain talent |