Focus Financial Partners Inc. [FOCS] Filings

10-Q 1 focs-20220930x10q.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, 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 November 1, 2022, the registrant had 65,865,932 shares of Class A common stock and 11,653,693 shares of Class B common stock outstanding.

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2022


		Page No.
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Unaudited condensed consolidated balance sheets	2
	Unaudited condensed consolidated statements of operations	3
	Unaudited condensed consolidated statements of comprehensive income (loss)	4
	Unaudited condensed consolidated statements of cash flows	5
	Unaudited condensed consolidated statements of changes in equity	7
	Notes to unaudited condensed consolidated financial statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	47
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	49
SIGNATURES		50

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,
	2021		2022
ASSETS
Cash and cash equivalents	$	310,684	$	128,528
Accounts receivable less allowances of $3,255 at 2021 and $3,949 at 2022		198,827		207,992
Prepaid expenses and other assets		123,826		174,007
Fixed assets—net		47,199		49,818
Operating lease assets		249,850		257,749
Debt financing costs—net		4,254		3,648
Deferred tax assets—net		267,332		232,332
Goodwill		1,925,315		2,092,787
Other intangible assets—net		1,581,719		1,637,816
TOTAL ASSETS	$	4,709,006	$	4,784,677
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable	$	11,580	$	11,822
Accrued expenses		72,572		108,542
Due to affiliates		105,722		66,868
Deferred revenue		10,932		15,554
Contingent consideration and other liabilities		468,284		320,176
Deferred tax liabilities		31,973		39,477
Operating lease liabilities		277,324		286,930
Borrowings under credit facilities (stated value of $2,407,302 and $2,438,779 at December 31, 2021 and September 30, 2022, respectively)		2,393,669		2,427,211
Tax receivable agreements obligations		219,542		221,237
TOTAL LIABILITIES		3,591,598		3,497,817
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY
Class A common stock, par value $0.01, 500,000,000 shares authorized; 65,320,124 and 65,865,932 shares issued and outstanding at December 31, 2021 and September 30, 2022, respectively		653		658
Class B common stock, par value $0.01, 500,000,000 shares authorized; 11,439,019 and 11,653,693 shares issued and outstanding at December 31, 2021 and September 30, 2022, respectively		114		116
Additional paid-in capital		841,753		930,042
Retained earnings		24,995		116,429
Accumulated other comprehensive income		3,029		11,378
Total shareholders' equity		870,544		1,058,623
Non-controlling interest		246,864		228,237
Total equity		1,117,408		1,286,860
TOTAL LIABILITIES AND EQUITY	$	4,709,006	$	4,784,677

See notes to unaudited condensed consolidated financial statements

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,
	2021		2022		2021		2022
REVENUES:
Wealth management fees	$	433,967	$	499,017	$	1,213,782	$	1,531,617
Other		20,568		20,847		60,283		64,025
Total revenues		454,535		519,864		1,274,065		1,595,642
OPERATING EXPENSES:
Compensation and related expenses		144,249		186,320		424,337		546,251
Management fees		127,166		122,971		345,443		397,612
Selling, general and administrative		75,637		89,915		208,481		273,336
Intangible amortization		46,055		67,331		133,041		192,256
Non-cash changes in fair value of estimated contingent consideration		36,243		(30,708)		96,241		(82,450)
Depreciation and other amortization		3,622		4,016		10,835		11,454
Total operating expenses		432,972		439,845		1,218,378		1,338,459
INCOME FROM OPERATIONS		21,563		80,019		55,687		257,183
OTHER INCOME (EXPENSE):
Interest income		206		126		310		146
Interest expense		(16,543)		(26,491)		(37,893)		(63,999)
Amortization of debt financing costs		(1,102)		(949)		(2,856)		(2,999)
Other income (expense)—net		312		(2,347)		(219)		(3,834)
Income from equity method investments		91		51		514		157
Total other expense—net		(17,036)		(29,610)		(40,144)		(70,529)
INCOME BEFORE INCOME TAX		4,527		50,409		15,543		186,654
INCOME TAX EXPENSE		2,678		12,120		6,038		59,965
NET INCOME		1,849		38,289		9,505		126,689
Non-controlling interest		(1,200)		(9,040)		(6,623)		(35,255)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	649	$	29,249	$	2,882	$	91,434
Income per share of Class A common stock:
Basic	$	0.01	$	0.45	$	0.05	$	1.40
Diluted	$	0.01	$	0.44	$	0.05	$	1.39
Weighted average shares of Class A common stock outstanding:
Basic		59,940,166		65,599,493		55,978,639		65,441,151
Diluted		60,438,510		65,821,228		56,447,070		65,729,339

See notes to unaudited condensed consolidated financial statements

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,
	2021		2022		2021		2022
Net income	$	1,849	$	38,289	$	9,505	$	126,689
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(5,057)		(13,237)		(5,876)		(20,662)
Unrealized gain on interest rate swaps designated as cash flow hedges		432		7,710		5,937		31,811
Comprehensive income (loss)		(2,776)		32,762		9,566		137,838
Less: Comprehensive (income) loss attributable to non-controlling interest		14		(7,994)		(7,194)		(38,055)
Comprehensive income (loss) attributable to common shareholders	$	(2,762)	$	24,768	$	2,372	$	99,783

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of cash flows

(In thousands)


	For the nine months ended
	September 30,
	2021		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	9,505	$	126,689
Adjustments to reconcile net income to net cash provided by operating activities—net of effect of acquisitions:
Intangible amortization		133,041		192,256
Depreciation and other amortization		10,835		11,454
Amortization of debt financing costs		2,856		2,999
Non-cash equity compensation expense		24,569		22,190
Non-cash changes in fair value of estimated contingent consideration		96,241		(82,450)
Income from equity method investments		(514)		(157)
Distributions received from equity method investments		773		1,059
Deferred taxes and other non-cash items		(570)		38,492
Changes in cash resulting from changes in operating assets and liabilities:
Accounts receivable		(22,247)		(7,959)
Prepaid expenses and other assets		(17,731)		(7,083)
Accounts payable		1,974		21
Accrued expenses		35,382		37,729
Due to affiliates		22,715		(39,020)
Contingent consideration and other liabilities		(61,181)		(69,038)
Deferred revenue		2,200		3,134
Net cash provided by operating activities		237,848		230,316
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions and contingent consideration—net of cash acquired		(286,803)		(361,675)
Purchase of fixed assets		(6,560)		(13,152)
Investment and other, net		(17,232)		(5,232)
Net cash used in investing activities		(310,595)		(380,059)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities		1,169,500		100,000
Repayments of borrowings under credit facilities		(419,145)		(68,523)
Proceeds from issuance of common stock, net		25,767		—
Payments in connection with unit redemption, net		(25,767)		—
Payments in connection with tax receivable agreements		(4,423)		(3,856)
Contingent consideration paid		(67,735)		(35,929)
Payments of deferred acquisition consideration		—		(1,484)
Payments of debt financing costs		(8,282)		(1,111)
Proceeds from exercise of stock options		6,186		1,158
Distributions for unitholders		(26,391)		(20,519)
Other		(46)		375
Net cash provided by (used in) financing activities		649,664		(29,889)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		(568)		(2,524)
CHANGE IN CASH AND CASH EQUIVALENTS		576,349		(182,156)
CASH AND CASH EQUIVALENTS:
Beginning of period		65,858		310,684
End of period	$	642,207	$	128,528

See Note 13 for supplemental cash flow disclosure

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Three months ended September 30, 2021 and 2022

(In thousands, except share amounts)


												Accumulated
	Class A			Class B				Additional				Other		Total
	Common Stock			Common Stock				Paid-In		Retained		Comprehensive		Shareholders’		Non-controlling
	Shares	Amount		Shares		Amount		Capital		Earnings		Income (Loss)		Equity		Interest		Total Equity
Balance at July 1, 2021	59,792,889	$	598		12,692,740	$	127	$	650,421	$	16,816	$	734	$	668,696	$	230,389	$	899,085
Net income	—		—		—		—		—		649		—		649		1,200		1,849
Issuance of units in connection with an acquisition and contingent consideration	—		—		64,706		—		—		—		—		—		—		—
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	418,669		4		(418,669)		(4)		21,901		—		—		21,901		—		21,901
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	34,898		—		—		—		1,825		—		—		1,825		—		1,825
Exercise of stock options	68,885		1		—		—		2,168		—		—		2,169		—		2,169
Change in non-controlling interest allocation	—		—		—		—		(18,833)		—		—		(18,833)		(4,129)		(22,962)
Non-cash equity compensation expenses	—		—		—		—		1,569		—		—		1,569		—		1,569
Currency translation adjustment-net of tax	—		—		—		—		—		—		(3,735)		(3,735)		(1,322)		(5,057)
Unrealized gain on interest rate swaps designated as cash flow hedges-net of tax	—		—		—		—		—		—		324		324		108		432
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		490		—		—		490		—		490
Balance at September 30, 2021	60,315,341	$	603		12,338,777	$	123	$	659,541	$	17,465	$	(2,677)	$	675,055	$	226,246	$	901,301

Balance at July 1, 2022	65,442,389		654		12,034,104		120		910,222		87,180		15,859	$	1,014,035	$	234,821	$	1,248,856
Net income	—		—		—		—		—		29,249		—		29,249		9,040		38,289
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	381,573		4		(381,573)		(4)		15,469		—		—		15,469		—		15,469
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	15,158		—		—		—		615		—		—		615		—		615
Exercise of stock options	26,767		—		—		—		736		—		—		736		—		736
Restricted stock units vesting and related withholding	45		—		—		—		—		—		—		—		—		—
Restricted common units vesting	—		—		1,162		—		—		—		—		—		—		—
Change in non-controlling interest allocation	—		—		—		—		1,009		—		—		1,009		(14,578)		(13,569)
Non-cash equity compensation expenses	—		—		—		—		2,226		—		—		2,226		—		2,226
Currency translation adjustment-net of tax	—		—		—		—		—		—		(10,666)		(10,666)		(2,571)		(13,237)
Unrealized gain on interest rate swaps designated as cash flow hedges-net of tax	—		—		—		—		—		—		6,185		6,185		1,525		7,710
Adjustments of deferred taxes, net of amounts payable under tax receivable agreements and changes from Focus LLC interest transactions	—		—		—		—		(235)		—		—		(235)		—		(235)
Balance at September 30, 2022	65,865,932	$	658		11,653,693	$	116	$	930,042	$	116,429	$	11,378	$	1,058,623	$	228,237	$	1,286,860

See notes to unaudited condensed consolidated financial statements

Table of Contents

FOCUS FINANCIAL PARTNERS INC.

Unaudited condensed consolidated statements of changes in equity

Nine months ended September 30, 2021 and 2022

(In thousands, except share amounts)


												Accumulated
	Class A			Class B				Additional				Other		Total
	Common Stock			Common Stock				Paid-In		Retained		Comprehensive		Shareholders’		Non-controlling
	Shares	Amount		Shares		Amount		Capital		Earnings		Income (Loss)		Equity		Interest		Total Equity
Balance at January 1, 2021	51,158,712	$	512		20,661,595	$	207	$	526,664	$	14,583	$	(2,167)	$	539,799	$	319,080	$	858,879
Net income	—		—		—		—		—		2,882		—		2,882		6,623		9,505
Issuance of units in connection with an acquisition and contingent consideration	—		—		233,098		1		—		—		—		1		—		1
Issuance (cancellation) of common stock in connection with offering, net	6,568,098		65		(6,306,301)		(63)		317,858				—		317,860		—		317,860
Issuance (cancellation) of common stock in connection with exercise of Focus LLC common unit exchange rights	2,249,615		22		(2,249,615)		(22)		109,677		—		—		109,677		—		109,677
Issuance of common stock in connection with exercise of Focus LLC incentive unit exchange rights	169,530		2		—		—		8,348		—		—		8,350		—		8,350
Exercise of stock options	169,386		2		—		—		5,343		—		—		5,345		—		5,345
Change in non-controlling interest allocation	—		—		—		—		(328,318)		—		—		(328,318)

Focus Financial Partners Inc. [FOCS] Filings
10-Q	[2022-11-03]
10-Q	[2022-08-04]
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]