Focus Financial Partners Inc. [FOCS] Filings

10-Q 1 focs-20210930x10q.htm 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2021

☐ 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)

(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 $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, 2021, the registrant had 60,333,968 shares of Class A common stock and 12,338,777 shares of Class B common stock outstanding.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2021


		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	6
	Notes to unaudited condensed consolidated financial statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	48
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	50
SIGNATURES		50

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated balance sheets

(In thousands, except share and per share amounts)


	December 31,		September 30,
	2020		2021
ASSETS
Cash and cash equivalents	$	65,858	$	642,207
Accounts receivable less allowances of $2,178 at 2020 and $2,644 at 2021		169,220		189,201
Prepaid expenses and other assets		65,581		130,883
Fixed assets—net		49,209		45,625
Operating lease assets		229,748		226,036
Debt financing costs—net		6,950		4,928
Deferred tax assets—net		107,289		237,042
Goodwill		1,255,559		1,429,196
Other intangible assets—net		1,113,467		1,183,248
TOTAL ASSETS	$	3,062,881	$	4,088,366
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable	$	9,634	$	11,714
Accrued expenses		53,862		89,410
Due to affiliates		66,428		89,139
Deferred revenue		9,190		12,372
Other liabilities		222,911		292,306
Operating lease liabilities		253,295		253,191
Borrowings under credit facilities (stated value of $1,507,622 and $2,263,477 at December 31, 2020 and September 30, 2021, respectively)		1,507,119		2,250,321
Tax receivable agreements obligations		81,563		188,612
TOTAL LIABILITIES		2,204,002		3,187,065
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY
Class A common stock, par value $0.01, 500,000,000 shares authorized; 51,158,712 and 60,315,341 shares issued and outstanding at December 31, 2020 and September 30, 2021, respectively		512		603
Class B common stock, par value $0.01, 500,000,000 shares authorized; 20,661,595 and 12,338,777 shares issued and outstanding at December 31, 2020 and September 30, 2021, respectively		207		123
Additional paid-in capital		526,664		659,541
Retained earnings		14,583		17,465
Accumulated other comprehensive loss		(2,167)		(2,677)
Total shareholders' equity		539,799		675,055
Non-controlling interest		319,080		226,246
Total equity		858,879		901,301
TOTAL LIABILITIES AND EQUITY	$	3,062,881	$	4,088,366

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of operations

(In thousands, except share and per share amounts)


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2020		2021		2020		2021
REVENUES:
Wealth management fees	$	311,805	$	433,967	$	925,527	$	1,213,782
Other		19,678		20,568		56,119		60,283
Total revenues		331,483		454,535		981,646		1,274,065
OPERATING EXPENSES:
Compensation and related expenses		114,702		144,249		346,460		424,337
Management fees		86,414		127,166		247,094		345,443
Selling, general and administrative		57,437		75,637		172,784		208,481
Intangible amortization		37,024		46,055		108,759		133,041
Non-cash changes in fair value of estimated contingent consideration		14,280		36,243		(621)		96,241
Depreciation and other amortization		3,120		3,622		9,131		10,835
Total operating expenses		312,977		432,972		883,607		1,218,378
INCOME FROM OPERATIONS		18,506		21,563		98,039		55,687
OTHER INCOME (EXPENSE):
Interest income		61		206		412		310
Interest expense		(8,903)		(16,543)		(32,546)		(37,893)
Amortization of debt financing costs		(709)		(1,102)		(2,200)		(2,856)
Loss on extinguishment of borrowings		—		—		(6,094)		—
Other income (expense)—net		(657)		312		25		(219)
Income from equity method investments		51		91		167		514
Total other expense—net		(10,157)		(17,036)		(40,236)		(40,144)
INCOME BEFORE INCOME TAX		8,349		4,527		57,803		15,543
INCOME TAX EXPENSE		4,405		2,678		16,512		6,038
NET INCOME		3,944		1,849		41,291		9,505
Non-controlling interest		(2,302)		(1,200)		(16,844)		(6,623)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	1,642	$	649	$	24,447	$	2,882
Income per share of Class A common stock:
Basic	$	0.03	$	0.01	$	0.51	$	0.05
Diluted	$	0.03	$	0.01	$	0.51	$	0.05
Weighted average shares of Class A common stock outstanding:
Basic		48,683,580		59,940,166		47,991,831		55,978,639
Diluted		48,810,328		60,438,510		48,040,014		56,447,070

See notes to unaudited condensed consolidated financial statements

Table of Contents

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,
	2020		2021		2020		2021
Net income	$	3,944	$	1,849	$	41,291	$	9,505
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		3,103		(5,057)		316		(5,876)
Unrealized gain (loss) on interest rate swaps designated as cash flow hedges		(981)		432		(9,308)		5,937
Comprehensive income (loss)		6,066		(2,776)		32,299		9,566
Less: Comprehensive income (loss) attributable to non-controlling interest		(3,219)		14		(13,864)		(7,194)
Comprehensive income (loss) attributable to common shareholders	$	2,847	$	(2,762)	$	18,435	$	2,372

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)


	For the nine months ended
	September 30,
	2020		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	41,291	$	9,505
Adjustments to reconcile net income to net cash provided by operating activities—net of effect of acquisitions:
Intangible amortization		108,759		133,041
Depreciation and other amortization		9,131		10,835
Amortization of debt financing costs		2,200		2,856
Non-cash equity compensation expense		15,588		24,569
Non-cash changes in fair value of estimated contingent consideration		(621)		96,241
Income from equity method investments		(167)		(514)
Distributions received from equity method investments		145		773
Deferred taxes and other non-cash items		4,148		(570)
Loss on extinguishment of borrowings		6,094		—
Changes in cash resulting from changes in operating assets and liabilities:
Accounts receivable		(25,716)		(22,247)
Prepaid expenses and other assets		(4,168)		(17,731)
Accounts payable		110		1,974
Accrued expenses		20,294		35,382
Due to affiliates		(11,749)		22,715
Other liabilities		(28,761)		(61,181)
Deferred revenue		1,889		2,200
Net cash provided by operating activities		138,467		237,848
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions and contingent consideration—net of cash acquired		(69,467)		(286,803)
Purchase of fixed assets		(12,691)		(6,560)
Investment and other, net		—		(17,232)
Net cash used in investing activities		(82,158)		(310,595)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities		305,000		1,169,500
Repayments of borrowings under credit facilities		(323,674)		(419,145)
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)
Contingent consideration paid		(45,069)		(67,735)
Payments of debt financing costs		(634)		(8,282)
Proceeds from exercise of stock options		1,559		6,186
Payments on finance lease obligations		(109)		(46)
Distributions for unitholders		(15,765)		(26,391)
Net cash provided by (used in) financing activities		(78,692)		649,664
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		(140)		(568)
CHANGE IN CASH AND CASH EQUIVALENTS		(22,523)		576,349
CASH AND CASH EQUIVALENTS:
Beginning of period		65,178		65,858
End of period	$	42,655	$	642,207

See Note 13 for supplemental cash flow disclosure

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Three months ended September 30, 2020 and 2021

(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		Loss		Equity		Interest		Total Equity
Balance at July 1, 2020	48,091,707	$	481		21,496,103	$	215	$	503,209	$	9,343	$	(8,516)	$	504,732	$	326,478	$	831,210
Net income	—		—		—		—		—		1,642		—		1,642		2,302		3,944
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	600,722		6		(600,722)		(6)		20,370		—		—		20,370		—		20,370
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	1,858,136		19		—		—		62,991		—		—		63,010		—		63,010
Exercise of stock options	43,807		—		—		—		1,392		—		—		1,392		—		1,392
Change in non-controlling interest allocation	—		—		—		—		(53,865)		—		—		(53,865)		(32,019)		(85,884)
Non-cash equity compensation expenses	—		—		—		—		1,207		—		—		1,207		—		1,207
Currency translation adjustment-net of tax	—		—		—		—		—		—		1,823		1,823		1,280		3,103
Unrealized loss on interest rate swaps designated as cash flow hedges-net of tax	—		—		—		—		—		—		(618)		(618)		(363)		(981)
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		1,315		—		—		1,315		—		1,315
Balance at September 30, 2020	50,594,372	$	506		20,895,381	$	209	$	536,619	$	10,985	$	(7,311)	$	541,008	$	297,678	$	838,686

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

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Nine months ended September 30, 2020 and 2021

(In thousands, except share amounts)


												Accumulated
	Class A			Class B				Additional		Retained		Other		Total
	Common Stock			Common Stock				Paid-In		Earnings		Comprehensive		Shareholders’		Non-controlling
	Shares	Amount		Shares		Amount		Capital		(Deficit)		Loss		Equity		Interest		Total Equity
Balance at January 1, 2020	47,421,315	$	474		22,075,749	$	221	$	498,186	$	(13,462)	$	(1,299)	$	484,120	$	319,850	$	803,970
Net income	—		—		—		—		—		24,447		—		24,447		16,844		41,291
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	1,180,368		12		(1,180,368)		(12)		33,736		—		—		33,736		—		33,736
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	1,943,838		20		—		—		64,793		—		—		64,813		—		64,813
Forfeiture of unvested Class A common stock	(834)		—		—		—		(27)		—		—		(27)		—		(27)
Exercise of stock options	49,685		—		—		—		1,559		—		—		1,559		—		1,559
Change in non-controlling interest allocation	—		—		—		—		(65,993)		—		—		(65,993)		(36,036)		(102,029)
Non-cash equity compensation expenses	—		—		—		—		3,397		—		—		3,397		—		3,397
Currency translation adjustment-net of tax	—		—		—		—		—		—		13		13		303		316
Unrealized loss on interest rate swaps designated as cash flow hedges-net of tax	—		—		—		—		—		—		(6,025)		(6,025)		(3,283)		(9,308)
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		968		—		—		968		—		968
Balance at September 30, 2020	50,594,372	$	506		20,895,381	$	209	$	536,619	$	10,985	$	(7,311)

Focus Financial Partners Inc. [FOCS] Filings
10-Q	[2021-11-04]
10-Q	[2021-08-05]
10-Q	[2021-05-06]
10-K	[2021-02-19]
10-Q	[2020-11-05]
10-Q	[2020-08-06]
10-Q	[2020-05-07]
10-K	[2020-02-25]
10-Q	[2019-11-07]
10-Q	[2019-08-08]
10-Q	[2019-05-09]
10-K	[2019-03-28]
10-Q	[2018-11-13]
10-Q	[2018-08-28]
S-1	[2018-05-24]