Focus Financial Partners Inc. [FOCS] Filings

10-Q 1 focs-20220331x10q.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 March 31, 2022

☐ 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 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.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2022


		Page No.
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Unaudited condensed consolidated balance sheets	2
	Unaudited condensed consolidated statements of operations	3
	Unaudited condensed consolidated statements of comprehensive income	4
	Unaudited condensed consolidated statements of cash flows	5
	Unaudited condensed consolidated statements of changes in equity	6
	Notes to unaudited condensed consolidated financial statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	41
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 6.	Exhibits	43
SIGNATURES		43

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,		March 31,
	2021		2022
ASSETS
Cash and cash equivalents	$	310,684	$	317,034
Accounts receivable less allowances of $3,255 at 2021 and $3,696 at 2022		198,827		209,209
Prepaid expenses and other assets		123,826		161,997
Fixed assets—net		47,199		46,832
Operating lease assets		249,850		256,064
Debt financing costs—net		4,254		3,580
Deferred tax assets—net		267,332		258,228
Goodwill		1,925,315		1,928,135
Other intangible assets—net		1,581,719		1,525,002
TOTAL ASSETS	$	4,709,006	$	4,706,081
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable	$	11,580	$	14,719
Accrued expenses		72,572		75,956
Due to affiliates		105,722		28,808
Deferred revenue		10,932		12,742
Contingent consideration and other liabilities		468,284		415,942
Deferred tax liabilities		31,973		36,501
Operating lease liabilities		277,324		284,613
Borrowings under credit facilities (stated value of $2,407,302 and $2,451,128 at December 31, 2021 and March 31, 2022, respectively)		2,393,669		2,438,183
Tax receivable agreements obligations		219,542		215,999
TOTAL LIABILITIES		3,591,598		3,523,463
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY
Class A common stock, par value $0.01, 500,000,000 shares authorized; 65,320,124 and 65,362,389 shares issued and outstanding at December 31, 2021 and March 31, 2022, respectively		653		653
Class B common stock, par value $0.01, 500,000,000 shares authorized; 11,439,019 and 11,601,814 shares issued and outstanding at December 31, 2021 and March 31, 2022, respectively		114		116
Additional paid-in capital		841,753		865,857
Retained earnings		24,995		54,097
Accumulated other comprehensive income		3,029		20,469
Total shareholders' equity		870,544		941,192
Non-controlling interest		246,864		241,426
Total equity		1,117,408		1,182,618
TOTAL LIABILITIES AND EQUITY	$	4,709,006	$	4,706,081

See notes to unaudited condensed consolidated financial statements

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
	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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements

(In thousands, except unit data, share and per share amounts)

1. GENERAL

Organization and Business— Focus Financial Partners Inc. (“Focus Inc.”) was formed as a Delaware corporation on July 29, 2015. Focus Inc. is the managing member of Focus Financial Partners, LLC (“Focus LLC”) and operates and controls the businesses and affairs of Focus LLC.

Focus LLC is a Delaware limited liability company that was formed in November 2004. Focus LLC’s subsidiaries commenced revenue-generating and acquisition activities in January 2006. Focus LLC’s activities are governed by its Fourth Amended and Restated Operating Agreement (the “Operating Agreement”). Focus LLC is in the business of acquiring and overseeing independent fiduciary wealth management and related businesses.

The unaudited condensed consolidated financial statements reflect the results of operations and financial position of Focus Inc. and its subsidiaries (the “Company”).

2. SUMMARY OF ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of only normal recurring adjustments, considered necessary for fair presentation have been included. The unaudited condensed consolidated financial statements include the accounts of Focus Inc. and its majority and wholly owned subsidiaries. Focus Inc. consolidates Focus LLC and its subsidiaries’ financial statements and records the interests in Focus LLC consisting of common units, restricted common units and the common unit equivalent of incentive units of Focus LLC that Focus Inc. does not own as non-controlling interests (see Note 3). Intercompany transactions and balances have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on February 17, 2022.

Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Use of Estimates—The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

Revenue

The Company disaggregates revenue by wealth management fees and other. The Company does not allocate revenue by the type of service provided in connection with providing holistic wealth management client services. The Company generally manages its business based on the operating results of the enterprise taken as a whole, not by geographic region. The following table disaggregates the revenues based on the location of the partner firm legal entities that generate the revenues and therefore may not be reflective of the geography in which clients are located.


	Three Months Ended
	March 31,
	2021		2022
Domestic revenue	$	370,954	$	507,311
International revenue		23,221		29,256
Total revenue	$	394,175	$	536,567

International revenue consists of revenue generated by partner firm legal entities in Australia, Canada and the United Kingdom.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London InterBank Offered Rate (“LIBOR”) or another rate that is expected to be discontinued. The amendments in ASU No. 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of ASU No. 2020-04 did not have a material impact on the Company’s consolidated financial statements; however, the Company will continue to evaluate the impacts, if any, of the provisions of ASU No. 2020-04 on the Company’s debt and hedging arrangements through December 31, 2022.

3. NON-CONTROLLING INTEREST AND INCOME PER SHARE

The calculation of controlling and non-controlling interest is as follows as of March 31, 2021 and 2022:


	2021		2022
Focus LLC common units	17,019,104		11,601,814
Focus LLC restricted common units	71,374		193,625
Common unit equivalents of outstanding vested and unvested Focus LLC incentive units(1)	7,006,625		6,998,055
Total common units, restricted common units and common unit equivalents attributable to non-controlling interest	24,097,103		18,793,494
Total common units, restricted common units and common unit equivalents of incentive units outstanding	79,211,945		84,155,883
Non-controlling interest allocation	30.4	%	22.3	%
Company’s interest in Focus LLC	69.6	%	77.7	%

(1)

Focus LLC common units issuable upon conversion of 16,728,882 and 16,202,274 (see Note 9) vested and unvested Focus LLC incentive units outstanding as of March 31, 2021 and 2022, respectively, was calculated using the common unit equivalent of vested and unvested Focus LLC incentive units based on the closing price of the Company’s Class A common stock on the last trading day of the periods.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

Basic income per share is calculated utilizing net income attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periods. The calculation of basic income per share is as follows:



	Three Months Ended
	March 31,
	2021		2022
Net income attributable to common shareholders	$	256	$	29,102

Weighted average shares of Class A common stock outstanding		52,200,029		65,331,370

Basic income per share	$	0.00	$	0.45

Diluted income per share is calculated utilizing net income attributable to common shareholders divided by the weighted average number of shares of Class A common stock outstanding during the same periods plus the effect, if any, of the potentially dilutive shares of the Company’s Class A common stock from stock options, restricted stock units and Focus LLC common units, restricted common units and incentive units as calculated using the treasury stock method:



	Three Months Ended
		March 31,
	2021		2022
Net income attributable to common shareholders	$	256	$	29,102

Weighted average shares of Class A common stock outstanding		52,200,029		65,331,370
Effect of dilutive stock options		415,041		407,059
Effect of dilutive restricted stock units		39,752		29,034
Total		52,654,822		65,767,463

Diluted income per share	$	0.00	$	0.44

Diluted income per share for the three months ended March 31, 2021 and 2022 excludes shares related to 155,000 market-based stock options, as modified, that vest on the sixth anniversary of the pricing of the Company’s initial public offering (“IPO”) with vesting based on the highest volume weighted average per share price for any ninety-calendar day period (“90-day VWAP”) prior to the anniversary, with 0% vesting if the highest 90-day VWAP is $80.00 or less and 100% vesting if the highest 90-day VWAP is $110.00 or more, with linear interpolation in between (see Note 9). Such market-based criteria were not met at March 31, 2021 and 2022.

Focus LLC common, restricted common and incentive units may be exchanged for the Company’s Class A common stock, subject to certain limitations (see Note 9). In computing the dilutive effect, if any, that the exchange would have on net income per share, net income attributable to Class A common shareholders would be adjusted due to the elimination of the non-controlling interests (including any associated tax impact). For the three months ended March 31, 2021 and 2022, such exchange is not reflected in diluted net income per share as the assumed exchange is not dilutive.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

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

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

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


	Gross Carry		Accumulated		Net Book
	Amount		Amortization		Value
Customer relationships	$	2,228,461	$	(787,016)	$	1,441,445
Management contracts		191,578		(57,153)		134,425
Other acquired intangibles		10,911		(5,062)		5,849
Total	$	2,430,950	$	(849,231)	$	1,581,719

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


	Gross Carry		Accumulated		Net Book
	Amount		Amortization		Value
Customer relationships	$	2,232,141	$	(844,289)	$	1,387,852
Management contracts		191,665		(60,000)		131,665
Other acquired intangibles		10,988		(5,503)		5,485
Total	$	2,434,794	$	(909,792)	$	1,525,002

6. FAIR VALUE MEASUREMENTS

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

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

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

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

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

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

Marketable securities

At March 31, 2022, the fair value of the Company’s investment in a mutual fund was $16,724. The fair value was determined using Level 1 inputs.

First Lien Term Loan

The implied fair value of the Company’s First Lien Term Loan (as defined below) based on Level 2 inputs at December 31, 2021 and March 31, 2022 are as follows:


	December 31, 2021				March 31, 2022
	Stated		Fair		Stated		Fair
	Value		Value		Value		Value
First Lien Term Loan - Tranche A	$	1,610,928	$	1,598,846	$	1,606,755	$	1,580,645
First Lien Term Loan - Tranche B		796,374		792,392		794,373		783,450

Derivatives

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

Business acquisitions

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

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


Balance at January 1, 2021	$	169,670
Additions to estimated contingent consideration		212,074
Payments of contingent consideration		(143,107)
Non-cash changes in fair value of estimated contingent consideration		112,416
Other		(1,026)
Balance at December 31, 2021	$	350,027
Additions to estimated contingent consideration		—
Payments of contingent consideration		(43,190)
Non-cash changes in fair value of estimated contingent consideration		(8,985)
Other		735
Balance at March 31, 2022	$	298,587

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

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Notes to unaudited condensed consolidated financial statements (continued)

(In thousands, except unit data, share and per share amounts)

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:

Focus Financial Partners Inc. [FOCS] Filings
10-Q	[2022-05-05]
10-K	[2022-02-17]
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]