Focus Financial Partners Earnings 2019-09-30

FOCS 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 focs-20190930x10q.htm 10-Q focs_Current_Folio_10Q

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, 2019

☐ 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 5, 2019, the registrant had 47,255,907 shares of Class A common stock and 22,198,665 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, 2019

		Page No.
PART I FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	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 members’ deficit/shareholders’ equity	6
	Notes to unaudited condensed consolidated financial statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 6.	Exhibits	45
SIGNATURES		46

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Financial Statements Introductory Note

The unaudited condensed consolidated financial statements and other disclosures contained in this report include those of Focus Financial Partners Inc. (“we,” “us,” “our,” “Focus Inc.,” the “Registrant” or the “Company”), which is the registrant, and those of Focus Financial Partners, LLC, a Delaware limited liability company (“Focus LLC”), which became the principal operating subsidiary of the Registrant in a series of reorganization transactions that were completed on July 30, 2018 (the “Reorganization Transactions”) in connection with our initial public offering (“IPO”). For more information regarding the transactions described above, see Note 3 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10‑Q.

As a result of the IPO and Reorganization Transactions, we became the managing member of Focus LLC. The unaudited condensed consolidated financial statements reflect the historical results of operations and financial position of the Company, including consolidation of its investment in Focus LLC, since July 30, 2018. Prior to July 30, 2018, the closing date of the IPO, the unaudited condensed consolidated financial statements represent the financial statements of Focus LLC. The unaudited condensed consolidated financial statements do not reflect what the financial position, results of operations or cash flows of the Company or Focus LLC would have been had these companies been stand‑alone public companies for the periods presented. Specifically, the historical financial statements of Focus LLC do not give effect to the following matters:

IPO and Reorganization Transactions;

U.S. corporate federal income taxes; and

Non‑controlling interest held by other members of Focus LLC after the IPO and Reorganization Transactions.

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated balance sheets

(In thousands, except share and per share amounts)


	December 31,		September 30,
	2018		2019
ASSETS
Cash and cash equivalents	$	33,213	$	51,263
Accounts receivable less allowances of $576 at 2018 and $800 at 2019		98,596		130,384
Prepaid expenses and other assets		76,150		79,064
Fixed assets—net		24,780		40,227
Operating lease assets		—		167,866
Debt financing costs—net		12,340		10,319
Deferred tax assets—net		70,009		77,919
Goodwill		860,495		1,073,283
Other intangible assets—net		762,195		1,014,303
TOTAL ASSETS	$	1,937,778	$	2,644,628
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable	$	8,935	$	10,456
Accrued expenses		36,252		61,337
Due to affiliates		39,621		40,151
Deferred revenue		6,215		8,653
Other liabilities		158,497		204,173
Operating lease liabilities		—		183,491
Borrowings under credit facilities (stated value of $838,985 and $1,282,079 at December 31, 2018 and September 30, 2019, respectively)		836,582		1,275,551
Tax receivable agreements obligations		39,156		47,242
TOTAL LIABILITIES		1,125,258		1,831,054
COMMITMENTS AND CONTINGENCIES (Note 13)
EQUITY
Class A common stock, par value $0.01, 500,000,000 shares authorized; 46,265,903 and 47,255,907 shares issued and outstanding at December 31, 2018 and September 30, 2019, respectively		462		472
Class B common stock, par value $0.01, 500,000,000 shares authorized; 22,823,272 and 22,198,665 shares issued and outstanding at December 31, 2018 and September 30, 2019, respectively		228		222
Additional paid-in capital		471,386		502,341
Accumulated deficit		(590)		(1,463)
Accumulated other comprehensive loss		(1,824)		(3,576)
Total shareholders' equity		469,662		497,996
Non-controlling interests		342,858		315,578
Total equity		812,520		813,574
TOTAL LIABILITIES AND EQUITY	$	1,937,778	$	2,644,628

See notes to unaudited condensed consolidated financial statements

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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,
	2018		2019		2018		2019
REVENUES:
Wealth management fees	$	220,235	$	299,348	$	620,886	$	825,728
Other		15,466		17,293		42,479		52,382
Total revenues		235,701		316,641		663,365		878,110
OPERATING EXPENSES:
Compensation and related expenses		107,382		111,829		262,004		318,808
Management fees		62,487		81,112		169,346		217,370
Selling, general and administrative		43,832		58,665		121,612		170,658
Management contract buyout		—		—		—		1,428
Intangible amortization		23,616		34,898		65,400		94,860
Non-cash changes in fair value of estimated contingent consideration		10,564		14,435		28,879		25,696
Depreciation and other amortization		2,077		2,797		6,121		7,535
Total operating expenses		249,958		303,736		653,362		836,355
INCOME (LOSS) FROM OPERATIONS		(14,257)		12,905		10,003		41,755
OTHER INCOME (EXPENSE):
Interest income		432		291		809		827
Interest expense		(12,996)		(15,852)		(45,480)		(43,135)
Amortization of debt financing costs		(828)		(919)		(2,716)		(2,483)
Gain on sale of investment		—		—		5,509		—
Loss on extinguishment of borrowings		(7,060)		—		(21,071)		—
Other (expense) income—net		(525)		9		(229)		(695)
Income from equity method investments		55		53		208		696
Total other expense—net		(20,922)		(16,418)		(62,970)		(44,790)
LOSS BEFORE INCOME TAX		(35,179)		(3,513)		(52,967)		(3,035)
INCOME TAX EXPENSE (BENEFIT)		3,745		(3,905)		5,667		(3,701)
NET INCOME (LOSS)		(38,924)		392		(58,634)		666
Non-controlling interest		28,726		881		48,436		(1,539)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(10,198)	$	1,273	$	(10,198)	$	(873)
Income (loss) per share of Class A common stock:
Basic	$	(0.24)	$	0.03	$	(0.24)	$	(0.02)
Diluted	$	(0.24)	$	0.03	$	(0.24)	$	(0.02)
Weighted average shares of Class A common stock outstanding:
Basic		42,351,043		47,044,507		42,351,043		46,653,820
Diluted		42,351,043		47,058,613		42,351,043		46,653,820

See notes to unaudited condensed consolidated financial statements

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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,
	2018		2019		2018		2019
Net income (loss)	$	(38,924)	$	392	$	(58,634)	$	666
Other comprehensive loss, net of tax:
Foreign currency translation adjustments		(318)		(2,464)		(1,824)		(2,797)
Comprehensive loss		(39,242)		(2,072)		(60,458)		(2,131)
Less: Comprehensive (income) loss attributable to noncontrolling interest		28,799		1,769		50,015		(494)
Comprehensive loss attributable to common shareholders	$	(10,443)	$	(303)	$	(10,443)	$	(2,625)

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)


	For the nine months ended
	September 30,
	2018		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(58,634)	$	666
Adjustments to reconcile net income (loss) to net cash provided by operating activities—net of effect of acquisitions:
Intangible amortization		65,400		94,860
Depreciation and other amortization		6,121		7,535
Amortization of debt financing costs		2,716		2,483
Non-cash equity compensation expense		31,612		13,375
Non-cash changes in fair value of estimated contingent consideration		28,879		25,696
Income from equity method investments		(208)		(696)
Distributions received from equity method investments		739		668
Other non-cash items		787		117
Loss on extinguishment of borrowings		19,001		—
Changes in cash resulting from changes in operating assets and liabilities:
Accounts receivable		(30,172)		(30,367)
Prepaid expenses and other assets		(6,035)		(4,820)
Accounts payable		1,219		1,240
Accrued expenses		21,382		39,968
Due to affiliates		7,503		365
Other liabilities		(6,315)		(21,964)
Deferred revenue		2,223		794
Net cash provided by operating activities		86,218		129,920
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions and contingent consideration—net of cash acquired		(296,821)		(494,336)
Purchase of fixed assets		(6,326)		(20,758)
Investment and other		(24,300)		—
Net cash used in investing activities		(327,447)		(515,094)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities		250,000		939,125
Repayments of borrowings under credit facilities		(449,019)		(496,906)
Proceeds from issuance of common stock, net		565,160		—
Payments in connection with unit redemption, net		(61,539)		—
Contingent consideration paid		(10,286)		(20,514)
Payments of debt financing costs		(4,612)		(3,743)
Proceeds from exercise of stock options		—		796
Payments on finance lease obligations		(147)		(138)
Distributions for unitholders		(1,308)		(15,225)
Net cash provided by financing activities		288,249		403,395
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		(97)		(171)
CHANGE IN CASH AND CASH EQUIVALENTS		46,923		18,050
CASH AND CASH EQUIVALENTS:
Beginning of period		51,455		33,213
End of period	$	98,378	$	51,263

See Note 14 for supplemental cash flow disclosure

See notes to unaudited condensed consolidated financial statements

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FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in members’ deficit/shareholders’ equity

Three months ended September 30, 2018 and 2019

(In thousands, except share amounts)


												Accumulated				Total Members’
	Class A			Class B				Additional				Other				Deficit/
	Common Stock			Common Stock				Paid - In		Accumulated		Comprehensive		Common		Shareholders’		Non - controlling
	Shares	Amount		Shares		Amount		Capital		Deficit		Loss		Units		Equity		Interest		Total Equity
Balance at July 1, 2018	—	$	—		—	$	—	$	38,286	$	(825,230)	$	(9,775)	$	37,176	$	(759,543)	$	—	$	(759,543)
Net loss	—	—	—	—	—	—	—		—		(28,111)		—		—		(28,111)		—		(28,111)
Issuance of restricted common units in connection with acquisitions and contingent consideration	—	—	—	—	—	—	—		—		—		—		7,560		7,560		—		7,560
Non-cash equity compensation expense-net of related forfeitures, related to incentive units	—	—	—	—	—	—	—		17,432		—		—		—		17,432		—		17,432
Currency translation adjustment-net of tax	—	—	—	—	—	—	—		—		—		108		—		108		—		108
Retirement of treasury stock	—	—	—	—	—	—	—		(2,067)		—		—		(842)		(2,909)		—		(2,909)
Distribution for unitholders	—	—	—	—	—	—	—		—		(2,174)		—		—		(2,174)		—		(2,174)
Reorganization of equity structure - July 30, 2018	23,881,002		239		22,499,665		225		(271,307)		855,515		9,667		(43,894)		550,445		258,670		809,115
Balance post-reorganization	23,881,002		239		22,499,665		225		(217,656)		—		—		—		(217,192)		258,670		41,478
Net loss	—		—		—		—		—		(10,198)		—		—		(10,198)		(615)		(10,813)
Issuance of common stock	18,648,649		186		—		—		564,974		—		—		—		565,160		—		565,160
Issuance of common stock in connection with acquisitions	—		—		323,607		3		—		—		—		—		3		—		3
Change in noncontrolling interest allocation	—		—		—		—		1,522		—		—		—		1,522		10,911		12,433
Non-cash equity compensation expenses	—		—		—		—		4,409		—		—		—		4,409		—		4,409
Currency translation adjustment-net of tax	—		—		—		—		—		—		(245)		—		(245)		(181)		(426)
Adjustment of deferred tax assets, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		36,581		—		—		—		36,581		—		36,581
Balance at September 30, 2018	42,529,651	$	425		22,823,272	$	228	$	389,830	$	(10,198)	$	(245)	$	—	$	380,040	$	268,785	$	648,825

Balance at July 1, 2019	47,116,817	$	471		22,308,446	$	223	$	489,566	$	(2,736)	$	(2,000)	$	—	$	485,524	$	330,331	$	815,855
Net income	—		—		—		—		—		1,273		—		—		1,273		(881)		392
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	109,781		1		(109,781)		(1)		2,252		—		—		—		2,252		—		2,252
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	40,900		—		—		—		838		—		—		—		838		—		838
Forfeiture of unvested Class A common stock	(11,591)		—		—		—		(382)		—		—		—		(382)		—		(382)
Change in non-controlling interest allocation	—		—		—		—		9,263		—		—		—		9,263		(12,984)		(3,721)
Non-cash equity compensation expenses	—		—		—		—		903		—		—		—		903		—		903
Currency translation adjustment-net of tax	—		—		—		—		—		—		(1,576)		—		(1,576)		(888)		(2,464)
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		(99)		—		—		—		(99)		—		(99)
Balance at September 30, 2019	47,255,907	$	472		22,198,665	$	222	$	502,341	$	(1,463)	$	(3,576)	$	—	$	497,996	$	315,578	$	813,574

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in members’ deficit/shareholders’ equity

Nine months ended September 30, 2018 and 2019

(In thousands, except share amounts)

Accumulated

Total

Class A

Class B

Additional

Other

Members' Deficit/

Common Stock

10-Q	2019-09-30	Quarter: 2019-09-30
10-Q	2019-06-30	Quarter: 2019-06-30
10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30

8-K	2019-11-20	Regulation FD, Exhibits
8-K	2019-11-07	Earnings, Regulation FD, Exhibits
8-K	2019-08-08	Earnings, Regulation FD, Exhibits
8-K	2019-07-26	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2019-06-05	Regulation FD, Exhibits
8-K	2019-05-28	Shareholder Vote
8-K	2019-05-09	Earnings, Regulation FD, Exhibits
8-K	2019-03-06	Regulation FD, Exhibits
8-K	2019-02-27	Regulation FD
8-K	2019-02-22	Officers, Regulation FD, Exhibits
8-K	2019-02-21	Earnings, Regulation FD, Exhibits
8-K	2019-01-16	Regulation FD
8-K	2018-11-30	M&A, Sale of Shares, Exhibits
8-K	2018-11-12	Earnings, Exhibits
8-K	2018-09-27	Enter Agreement, Sale of Shares
8-K	2018-09-27	Regulation FD, Exhibits
8-K	2018-08-28	Earnings, Regulation FD, Exhibits
8-K	2018-07-25	Enter Agreement, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Officers, Amend Bylaw, Exhibits

EV	Eaton Vance	4,748
LAZ	Lazard	4,377
AMG	Affiliated Managers Group	3,841
HLI	Houlihan Lokey	2,896
ARES	Ares Management	2,874
CG	Carlyle Group	2,499
WHG	Westwood Holdings	264
SAMG	Silvercrest Asset Management Group	109
MDLY	Medley Management	97
GROW	US Global Investors	31

EX-31.1	focs-20190930ex311686748.htm
EX-31.2	focs-20190930ex3121c09f3.htm
EX-32.1	focs-20190930ex3219b4680.htm